Designed by Apple in California. Assembled in China. This familiar line on the back of iPhones has summed up the world order for the past two decades: American innovation married with low-cost Chinese manufacturing to deliver cheap, quality products for the world. But as China pursues its own tech ambitions, a threatened US is moving to cut Chinese firms off from American scientific know-how and pushing the world into a tech divide that neither country has really prepared for. The Trump administration has targeted Huawei Technologies, one of China’s tech champions, by launching a one-two punch combination in its fight to ensure that national security is not compromised in US telecoms infrastructure, while simultaneously reining back China’s dominance in next-generation 5G wireless networks. By inking an executive order restricting US tech purchases by “foreign adversaries” that are deemed a national security risk, as well as putting Huawei on a government blacklist, the US has effectively cut off Huawei’s oxygen supply by limiting its access to critical chips and software from American companies. Trump says Huawei could be included in deal to end trade war This is not a short-term negotiating tactic by the Trump administration designed to extract a concession – rather it is the opening salvo in a new tech cold war that could upend the global supply chain and rewrite business orders worldwide. “The Huawei case clearly shows that global economic networks have entered the realm of geo-strategy,” said Abraham Newman, a professor at the school of foreign service and department of government at Georgetown University. “ The hyper-globalisation of the last twenty years is unsustainable given the real geopolitical constraints. We are entering a new phase,” said Newman, who is the co-author of several books including Voluntary Disruptions: International Soft Law, Finance, and Power. Two decades ago China erected a Great Firewall between itself and the rest of the world, effectively blocking US online services from Facebook to Google. Although this was primarily aimed at controlling the free flow of outside information to Chinese citizens – some of which may have been critical of the central government – it also had the effect of boosting the domestic internet industry massively and creating a separate Chinese ecosystem with its own innovations. Simultaneously, as China pursued the slow opening up of its economy, it also set a variety of thresholds for foreign companies wanting to do business in the country, partially to protect domestic incumbents. From manufacturing, technology to finance – if a foreign company wants access to China’s 1 billion consumers then it typically has to form a joint venture with a Chinese firm and share know-how to operate legally. The US has now tired of this – calling it “forced technology transfer”, unfair and accusing China of contravening WTO rules in some cases. China has refuted this assessment and as a result the US has decided to build a bigger digital wall. Microsoft said to halt new orders from Huawei The takedown of Huawei, particularly its participation in the roll-out of powerful, next-generation 5G mobile networks globally, is not simply about economics though – the US fell behind in telecoms technology a long time ago. In a data-driven age, Huawei has long been seen by the US military and defence establishment as a national security threat, open to exploitation by China’s intelligence agencies. The Chinese company has repeatedly denied this charge. As such, a major part of the US political establishment – including both prominent Republicans and Democrats – now believe it is time to cut Huawei down to size. By removing the Chinese company’s access to critical US tech such as Google’s Android operating system and a variety of US chips, the US can stop Huawei’s overseas expansion in its tracks and at the same time check China’s rapid technological rise. Speaking in October 2018 before US midterm elections, US Vice-President Mike Pence accused Beijing of using every tool at its disposal to undermine the US political system and warned American companies, including tech giant Alphabet, which owns Google, to disengage from China until the country stops actions aimed at undermining the US’ “most cherished ideals”. Huawei’s phone shipments could fall by up to a quarter, analysts say Former White House chief strategist Steve Bannon this month said Beijing should give up any hope that it can wait out the Donald Trump years for a less antagonistic administration, predicting that China will feature prominently in the 2020 US presidential election. Last year's US trade blockade of ZTE, which brought the Chinese telecom gear maker to its knees, and the current attacks on larger rival Huawei are merely the opening blows in a broad tech war that the current administration is determined to pursue, even if the two countries come to a truce on the trade dispute, according to sources familiar with US policy thinking. And this more hawkish stance has also been adopted in Beijing of late. Steve Bannon says killing Huawei more important than trade deal with China After the failure of recent talks aimed at ending a trade war between the world’s two biggest economies, Chinese politicians and scholars appear to have opted for a strategy of “ending a fight with a fight”. Chinese President Xi Jinping has called for the nation to embark on a new Long March to “start all over again”, and there is a growing feeling in China that it has now entered an ineluctable superpower struggle, with similarities to the fight between US and Japan in the 1980s. That ended with Japan agreeing to the 1985 Plaza Accord that saw the yen appreciate rapidly against the US dollar, hitting exporters, resulting in the Japanese authorities over-compensating with rate cuts, which in turn kicked off a historic boom-and-bust cycle – one which China does not want to emulate. The Chinese leadership is determined to avoid signing an “unequal treaty” with the US, which would bring back more distant and negative comparisons with treaties signed under imperial rule in the 19th century – such as the Treaty of Shimonoseki with Japan, which ended the first Sino-Japanese war and saw Taiwan handed to the Japanese. “Technological innovation is the root of life for businesses,” Xi said on May 22 during a visit to Jiangxi province, state-run news agency Xinhua reported. “Only if we own our own intellectual property and core technologies, can we then make products with core competitiveness and [we] won’t be beaten in intensifying competition.” Many have concluded that the real source of tension between the US and China is not just a trade imbalance, but rather the issue of whether China has the right to develop its own, home-grown hi-tech industry. “China and the US could continue fighting for another 100 years, even if they agree a current trade war truce, as the two countries compete in every domain, from trade, military to technology,” said a former tech official who served for several decades at China’s Ministry of Science and Technology and who declined to be named. Why Trump’s Huawei ban deals a harder blow than his tariffs The globalisation of the 1990s – something which Trump has railed against as a destroyer of blue-collar US jobs – transformed the world economy with interconnected supply chains aimed at maximising efficiency. China and the US enjoyed a honeymoon period though, as cooperation provided cheaper ‘Made-in-China’ products to US consumers and opened the huge Chinese market to US firms. The process also allowed China to train its local talent while quickly adopting the latest US technologies to build up its domestic industries. But this dynamic has changed from a win-win game to a zero-sum one in the eyes of the US. Speed up to 2019 and China has rapidly narrowed its GDP gap with the US. In terms of the share of global GDP, the gap between the two economies is forecast to be only 5 percentage points in 2023, down from about 27 points in 2000, according to the International Monetary Fund last year. There has also been qualitative change. China, which not long ago was labelled a ‘copycat nation’, recently announced its ambition to lead the world in high-end manufacturing from electric vehicles, aircraft to robotics, as part of its Made-in-China 2025 policy plan. Artificial intelligence has become a key battleground. ‘Switch to Huawei!’: US ban could hurt Apple sales as Chinese show support As well as Huawei, China now has some of the biggest technology firms in the world, such as internet giant Tencent Holdings and e-commerce leader Alibaba Group Holding, both of which have built up powerful China-centric platforms that cater to the country’s 1 billion consumers without much reliance on US-made technology. Alibaba is the owner of the South China Morning Post . Whether they are affected by an escalating tech war could depend, for example, on whether online tools used by Chinese programmers and engineers to write code are seen by the US as something that can be subject to export controls. The US government is reportedly looking to widen its trade ban to include companies such as surveillance camera giant Hikvision and facial recognition upstart Sensetime. Moreover, the wide reach of US policy means that even non-US companies whose products contain more than 25 per cent of American-origin technology, can also be prevented from supplying to the Chinese. “The decoupling of supply chains is already happening, and will go deeper,” said Paul Triolo, who served more than two decades in US government, providing analytics support to senior policymakers on China’s rise in science and technology before joining Eurasia Group as head of global technology policy. The US government will continue to target Chinese companies that it sees as a potential threat to national security, Triolo said. This also extends to economic security, so the US will increasingly consider cutting off access to US technology to companies and sectors which benefit from Chinese state subsidies, such as semiconductor manufacturing. “If the trade negotiations continue to stall and are not restarted, it is more likely that China will take further measures to limit US tech company operations in China, and then we will be in a race to the bottom in terms of decoupling,” said Triolo. Trade war and Huawei ban push China to rethink economic ties with US To tackle these headwinds, US companies in China are increasingly adopting “In China, for China” strategies, localising manufacturing and sourcing within China to mainly serve the China market, according to a joint survey by AmCham China and AmCham Shanghai this month. This contrasts with the “In China, for the world” strategy that most MNCs pursued in the past, when labour costs were low and setting up R&D facilities in the country was never seen as a national security issue. In the meantime, China has been pushing private enterprise to accelerate development of home-grown core technologies via subsidies and supportive policies. Over the last four years, Huawei’s chip arm HiSilicon has been manufacturing its own Kirin chips to boost self-sufficiency in semiconductors, but even these efforts appear to have been thwarted by the US ban. Most of HiSilicon’s chip designs are licensed from ARM but the UK chip designer this month said it would stop licensing its technology to Huawei as its products contain “US origin technology”. Even the software that is required for chip design is currently monopolised by US companies. China relies largely on electronic design automation (EDA) software from market leaders like Cadence and Synopsys – both of which are US companies. “Proprietary equipment in making good-quality semiconductors still places China squarely in the global supply chain,” said Zhong Rui, program assistant for the Kissinger Institute on China and the United States at the Wilson Center, whose research focuses on how national interests can impact business and technology policies. Here’s why US doesn’t have a 5G telecoms giant like Huawei To be sure, China and the US are still largely interdependent. Although smartphone giant Apple, for example, uses few Chinese components in an iPhone, it still assembles the final device in Chinese factories. Should the world move towards a true decoupling of the tech supply chain, it will be a lose-lose situation for both countries given that technology supply chains are so closely intertwined, analysts say. “The two nations need each other too much. What we will probably see is a decoupling in some sectors and with respect to some firms, and a much higher degree of suspicion in other sectors,” said Henry Farrell, professor of political science and international affairs at George Washington University. “ Geopolitics is becoming a new form of risk for firms to manage.” In China though, there is scepticism that a true digital iron curtain can be achieved. “It is impossible for either China or the US to own all the core technologies in the world,” said the retired official from China’s Ministry of Science and Technology. “What China really wants to achieve is to exchange agate with pearl. It’s just at the moment, China’s home-grown tech is not good enough to be called pearl.”