Two-faced US trade policy erodes Atlantic alliance

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EU’s new investment pact with China calls Trump’s bluff on a tech war that gives cover to US side deals with Chinese companies

by Spengler –Asia Times

European distrust of American motives was behind EU leaders’ signing last week of a Comprehensive Agreement on Investment with China over the urgent objections of the Donald Trump administration and Joe Biden’s transition team.

Washington’s restrictions on trade and investment with China, Europeans believe, provide pretexts for dodgy deals that favor US companies at the expense of competitors on the other side of the Atlantic.

The Trump administration of course has long been in a trade war with Beijing, and there have been numerous news reports that Biden’s advisers had let European officials know they hoped for a delay that would give the new administration time to chime in before finalization of the pact.

Matt Pottinger, deputy national security adviser to Trump, issued a statement saying, “Leaders in both US political parties and across the US government are perplexed and stunned that the EU is moving towards a new investment treaty right on the eve of a new US administration.”

Europe has ignored the pressure because Washington isn’t fighting a war but rather is talking war while American companies work out their side deals with China.

Another source of conflict is Washington’s dodgy response to Chinese leadership in telecom equipment. The Trump administration backed a putative software-based solution, rather than put resources behind competing 5G hardware from Huawei competitors like Ericsson and Nokia.

As Henry Kressel explained in a December 29 news analysis, a touted software-based alternative will take five to seven years and enormous expense to roll out, while Huawei’s network is ready to install.

One cause of European rancor, the Financial Times reported on December 24, is that US authorities grant exceptions to American companies trading with China while denying them to Europeans.

“European tech executives and diplomats are accusing the US of using its sanctions regime to shut them out of the Chinese market while offering exemptions for American companies,” the newspaper reported. “Over the past two years, the US has imposed aggressive sanctions on Chinese companies such as Huawei and, as of Friday, the chipmaker SMIC, which have prevented them from buying most US-made technologies.”

The Financial Times quoted an unnamed European senior executive as saying the sanctions had created an “America First” trade policy. “So far, US companies have been given licenses to supply Huawei, while European suppliers cannot.”

Many European businesses that produce chips and chipmaking equipment are affected by American sanctions because they rely on US intellectual property. A second European tech executive complained of having once been “stopped from supplying components to Chinese buyers because of suspicions that they could be used for military purposes. But the market for the components was quickly filled by US vendors selling through middlemen.”

Trade restrictions always provide opportunities for special treatment of the politically connected regardless of which party is in power, as the Wall Street Journal observed in a December 28 editorial: “As Mr. Trump’s tariffs began to bite, Congress sent hundreds of letters to the US Special Trade Representative, supporting specific tariff exclusions.”

Despite US sanctions, there is no shortage of computer chips in China, which expects to install 10 million 5G base stations by 2024. Huawei has limited access to the top-of-the-line chips that power high-end smartphones, with transistor gate widths of seven nanometers or less – but it doesn’t need them for its mobile broadband infrastructure. The US sanctions have nuisance value for Huawei, but haven’t stopped the Chinese broadband juggernaut.

Sales of American chip design and testing software to Chinese customers boomed during 2020, as I reported in a December 24 analysis (“The tech war that isn’t”). Cadence, one of the top three American firms, doubled its Chinese sales during the third quarter.

Although the Commerce Department banned sales to Huawei’s HiSilicon chip design subsidiary, Chinese startups staffed by former top engineers for the American design firms – and in some cases funded by the American firms – have hired Huawei engineers to produce the same designs under a different corporate logo. China is the world’s biggest market for chip design, and American firms can’t maintain their lead without selling to China.

No American firm manufactures telecom infrastructure. The Trump administration declined to mobilize American resources to create a competitor to Huawei, and also refused to put money behind the number two telecom equipment maker, Sweden’s Ericsson. There is an amusing backstory to this punt, in which I played a bit part.

In the summer of 2019 I invited a senior Huawei executive to breakfast at New York’s Princeton Club. He asked me why the US didn’t get Cisco – formerly the top maker of Internet routers – to buy Ericsson, and create an American national champion. I showed him Ericsson’s return on equity (in the single digits) and Cisco’s (in the 30%-plus range), and told him that US companies preferred software to less-profitable hardware.

Then in October of the same year, Urs Gehriger, the foreign editor of the Swiss newspaper Weltwoche interviewed me, and I mentioned the conversation with the Huawei executive.

A few weeks later, unbeknownst to me, Trump’s chief economic advisor Larry Kudlow — my old friend and colleague from Bear Stearns — approached Cisco CEO Chuck Robbins, and “discussed a potential deal to buy all or part of a European equipment firm,” as the Wall Street Journal reported months later. Robbins gave him exactly the answer that I had predicted to the Huawei executive.

The Journal article continued: “Mr. Robbins ‘didn’t want the U.S. to fall behind,’ the person said, but the company, which makes computer networking gear, was unwilling to invest in a less profitable business like Nokia or Ericsson without some sort of financial incentives.”

The Trump administration wasn’t offering any such incentives — a fatal mistake, in my view. Given the cold shoulder by Cisco, Kudlow then started listening to the software industry, which claimed that fancy coding could turn generic computer components into an alternative to Huawei.

He enthused to the Wall Street Journal, “Dell and Microsoft are now moving very rapidly to develop software and cloud capabilities that will, in fact, replace a lot of the equipment. To quote Michael Dell, ‘Software is eating the hardware in 5G.’”

To a hammer, everything looks like a nail, and to software companies, the solution to every problem looks like a million lines of code, especially if the federal government provides a US$1 billion subsidy. That is what the software industry coalition, the Open Radio Access Network (O-RAN), is demanding from the federal government.

It’s one of the worst ideas to pass muster in American industry since New Coke, as Kressel explained. No one knows if it will work; software might substitute for the sophisticated custom chips that filter out the signal from the noise in ultra-high-speed 5G transmissions, but they might not.

It will take about five years to find out, according to industry experts, and the debugging and testing of billions of lines of code probably would take another two years.

Network security has been the Trump adminstration’s stated concern about Huawei 5G networks, but an open-access system with thousands of access points offers countless opportunities for malign actors. Worst of all, the software solution only handles the routing of information once it is transmitted from a base station to a central network.

The 5G applications for the internet of things, including autonomous vehicles and self-programming industrial robots, require greater computing power in the base station itself, to allow the 5G network to communicate with client machines.

There are a couple of small-scale test projects for the O-RAN approach in Europe, but European telecom experts view the software-based solution as another feckless American welfare program for the world’s richest tech companies.

That’s why Europe in November put forward its own declaration of independence from American semiconductor technology.

In early December, the EU agreed on a “European initiative on processors and semiconductor technologies,” committing about $30 billion of the European Recovery and Resilience Facility funds to “digital sovereignty.”

As Thierry Breton, the EU Commissioner for Internal Market, put it: “Europe has all it takes to diversify and reduce critical dependencies. A collective approach can help us leverage our existing strengths and embrace new opportunities as advanced processor chips play an ever more important role for Europe’s industrial strategy and digital sovereignty.”

That of course means reducing dependence on US intellectual property.

China is, of course, paying close attention. A European diplomat based in China told the Financial Times, “This declaration shows that European governments want to be less dependent on US technology, although that will take a long time. This process was accelerated by the US sanctions. For European companies, China is such a big market that they need to find ways of serving it.”

That remark was cited in a report on the Comprehensive Agreement on Investment December 31 on the Chinese political website guancha.cn.

 

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