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May 24, 2019updated 28 May 2019 9:45am

How do you solve a problem like Huawei?

By GlobalData Thematic Research

After years of tension, the Huawei problem boiled over this month, and the US-China trade spat looked to have turned into a full-on economic war rather than just a tit-for-tat tariff joust.

By 2040 the wider issue may well have lead, if not to WW3, to a dangerously polarised world split between two giant economically and politically equal superpowers – unlike the US and the Soviet Union at the height of the Cold War – each with its own internet, tech stack, supply chains and captive markets.

US security chiefs see Huawei, the world’s largest telecoms equipment company and second largest handset company, as a front for the Chinese state, and a key element in China’s efforts to destabilise the West and assert its own power.

They insist that its devices and network gear will be used at the behest of the Politburo Standing Committee to spy on the US and its allies, and possibly sabotage their infrastructures as what is likely to be a decades-long struggle for political, economic and technological leadership plays out.

The Huawei issue has now moved front and centre as the build-out begins across the world of the warp-speed 5G networks, at least 40 times faster than current 4G networks, that will enable everything from smart homes and autonomous vehicles to delivery drones and advanced online healthcare. Huawei is the leading 5G supplier by far.

The response of the Hawks advising Trump is to take Huawei out before it is can install ‘weaponised’ 5G equipment among US allies. Some of those allies though – the UK, France and Germany – have not yielded to US pressure to exclude Huawei from bidding for 5G contracts.

Washington is setting out to bypass this by depriving Huawei of the very wherewithal it needs to build its equipment. It means to ban all exports of hardware and software components that contain any US content, including IP, from wherever they are sourced. Crucial suppliers such as ARM, Intel, and Qorvo are already instructing their staffs to cease all contact with Huawei.

Huawei could be left starved to death by 2021 when its stockpiles of key components run out with no viable alternatives in sight.

The export bans come into effect on August 19, unless there is some breakthrough in the trade talks that get to the core of the dispute as far as the US is concerned: reform of China’s authoritarian capitalist economic model, and comprehensive implementation of non-tariff discrimination.

But it is howling at the moon to think that the Xi Jinping regime will reform the system. Indeed it has beefed it up over the past three years.

If the US does activate its currently suspended scheme to take down Huawei and ‘blacklist’ other strategic Chinese companies, China has already hinted at one way it might retaliate.

Back in 1991 Deng Xiaoping noted that “Saudi Arabia has oil. China has rare earths.”

These are vital to the production of missiles, lasers, electronic controls for radars and a host of other high- tech products.

China controls 90% of the global market from mining to processing. Even the US’s one rare-earth mine depends on China to process the material.

On 20 May Xi Jinping made a symbolic visit to the JL Mag Rare Earth facility and talked of “this generation’s ‘Long March’”.

If China cuts off rare earth supplies it could cripple key sectors of the US and European economies.

The Huawei affair has ramifications which range far and wide.

For example, US tech companies that are heavily revenue dependent on China – such as Apple, Intel, Qualcomm, Broadcom, Texas Instruments and Nvidia – are at growing risk of losing access to the Chinese market which will remain the world’s key demand driver for tech products.

Should the costs of administration policy to the US economy and strategic sectors of US business become unpalatable, market pressures from Wall Street would almost certainly force policy changes, while the battle for global leadership would continue at scale and unabated.

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