US political opinion against
China has two solid bases. The first is the longstanding racist and
protectionist sentiment in the white working class; the second is a more recent
anxiety about China’s economic prowess in America’s ruling elite. This
article notes some historical aspects of anti-Chinese racism in the white
working class, part of a wider racial prejudice that persists today, and also
examines the more contemporary aspects of the worries that China gives America
by looking at the example of Huawei, China’s flagship telecommunications and
electronics company. Anyone paying attention to President Trump’s tweets to his
domestic audience will be aware that there is a close connection between the
two issues.
Racism and the American
labour movement
The US state was founded upon
the dispossession and virtual extermination of indigenous people. Until the end
of the Civil War in 1865, enslavement of black Africans on southern plantations
was another important element, alongside the seizure of territory from Mexico. Not
surprisingly, the characterisation of American Indians, blacks and Mexicans as
uncivilised and inferior was common in white American discourse.
White European settlers remained the key grouping with political and economic
power – and relative economic privileges even in the working class – despite
the successive waves of immigration and the diverse cultural mix that came to
make up the country. Chinese labourers migrating to the US, principally on the
west coast and from the mid-1800s, were another element of this mix, and one
that got a particular form of racism from whites.
It was not just anti-Chinese
riots and pogroms, with beatings, lynchings and murder, such as in Los Angeles
in 1871, Rock Springs (Wyoming) and Tacoma (Washington) in 1885 and Seattle in
1886. The Tacoma riot was followed by a white mob, including the mayor and
councillors, forcibly expelling the whole Chinese community, then burning down
all property in the area, with the Fire Department doing nothing. This action
became known as the ‘Tacoma method’.
Also note the views of Samuel
Gompers, a founder of what became the American Federation of Labor in 1886, and its president, almost continuously, until his death in 1924. In 1902,
Gompers co-authored an AFL pamphlet entitled Meat vs. Rice: American Manhood
against Asiatic Coolieism: Who Shall Survive? This followed from the normal
trade union practice of confronting divisions in the working class by enforcing
them and isolating ‘outsiders’, including women, but especially those in other
ethnic groups. But his opinions on Chinese workers had already been made clear
in the AFL Convention of 1901:
“Of course, I realise the desirability of having
every establishment possible unionised, and to organise our fellow workers, but
you must take under consideration the further fact that the American labour
movement has set its face against the Chinese coming to this country, and upon
our demands the law has been passed for the exclusion of Chinese from the
United States or from any of the territories or possessions of the United
States … In other words, the American labour movement stands committed against
the Chinese coming to our country or any possession of our country.”
He was referring to the Chinese
Exclusion Act of 1882, the first US law to prevent all members of a specific
ethnic or national group from immigrating, which was passed with strong support
from the white working class. That act was renewed, until slightly amended in 1943
and more substantially changed by a 1965 act that abolished the national
origins formula. It is little wonder that the American working class has
remained so politically weak and divided.
The ruling perspective
US workers focused on
competition from cheap Chinese labour, while US political elites had broader
interests. The latter have consistently been interested in a carve up of China,
or of forcing treaties on it, along with other powers, at least when their
attention was not distracted elsewhere. After the Chinese revolution of 1949,
China fell more readily under the heading of ‘Communist threat’, having helped
give the US a major setback when the war in Korea was fought to a draw in 1953.
As one might expect, this did not go down too well, and gave an anti-Chinese
angle to the McCarthy anti-communist witch-hunts in the US during the early
1950s.
By the early 1970s, however, the
US decided to take advantage of a political split between China and Russia to
make overtures to China and find a way into what was then a closed, but
potentially very large, market for US business. This culminated in President
Nixon’s week-long visit to China in February 1972. It took some time before
economic relationships opened up for the US, but this process was accelerated
in 1979 by the US changing its recognition from the ousted nationalist
government, based in Taiwan, to the government of the People’s Republic in
mainland China.
This is not to say that the US
political worries about China stopped, although these narrowed down a bit and
for a while were mainly concerned with the potential for Chinese spying. For
example, American space researchers are generally prohibited from working with
Chinese citizens who are seen as affiliated with the Chinese government in any
way, and in 2011 the US Congress banned NASA from hosting Chinese visitors.
Wishing to emulate the ‘American way of life’ is fine; competing with America
in high tech fields, or in espionage, is not.
US trade and China
Chinese workers are no longer
seen as a threat to US workers as ‘coolies’ undercutting them in the domestic
labour market. Instead, there has been another challenge from international
trade relationships that has come to the fore in the past few decades.
Big US corporations have
expanded their overseas operations to take advantage of cheap labour elsewhere,
with their facilities in the US moving more to areas of business that are
better protected by patents and intellectual property rights. This has been one
factor behind a growing US trade deficit in goods production, and also an easy
focus for popular anti-China sentiment. By 2010, this sentiment was reflected
in the US mid-term Congressional elections. Both Republicans and Democrats
accused each other’s candidates of supporting free trade with China. That
country had become the latest economic demon in foreign trade, replacing the
now stagnant Japanese economy.
Twenty years ago, China
accounted for around a fifth of the US trade deficit of $337bn. By 2017, to
protectionist shock and horror, China’s share of the $807bn goods deficit had
risen to nearly half. This was the backdrop to Trump’s latest trade tariffs on
China and the claim in his 2016 election campaign that China is ‘raping’ the US
with free trade. There was lots of media coverage of how Apple was getting its
iPhones made by Foxconn in China, and how Wal-Mart relied on China-based
suppliers for many imports.
These complaints leave aside
that China still accounts for only a fifth of US imports of goods. Although
this share rose from 8% in 1999, US exports to China have also become more
important, growing from 2% to around 8% of the total over the same period.
Furthermore, the goods imported from China contain components supplied by other
countries, including from the US itself. A 2015 OECD study found that the
foreign content of Chinese exports was around 30%, with that proportion rising
to more like 50% or so for electrical machinery and electronics goods.
More importantly, the complaints
ignore how a country’s trade deficit is commonly a sign that it is consuming
more than it produces! Even more relevant to considering the whole picture is
America’s dominant position in the global economic and financial system. It
benefits from a wide range of payments and financial inflows from the rest of
the world, ones that easily finance the US trade deficit.
However, these points get no hearing in reactionary US discourse.
China’s tech challenge
This brings me to the issue that
really concerns the US business elite: China’s rise in the sphere of technology.
China is not overtaking the US in every field, or even in many. But the areas
in which it has made gains are striking, and they undermine the view that
China’s capabilities are limited to doing bad copies of western technology that
it has stolen. Just consider the case of Huawei Technologies, headquartered in
Shenzen, China.
Huawei is now the world’s second
or third largest supplier of smartphones, behind Korea’s Samsung, but in close
competition with Apple. Other Chinese companies, Xiaomi, ZTE and Oppo, are also
major suppliers, although, like Huawei, a large chunk of their market is in
China itself. But note that Chinese-sourced smartphones are also dependent upon
foreign technology, especially from the US, such as Google’s Android software
and Qualcomm’s modems and chipsets, so one should not exaggerate China’s
prominence in this area.
For example, one study noted
that Huawei paid western companies $222m in licensing fees for technology in
2010 alone, with $175m of that paid to American firms.
Qualcomm was a recipient of some $600m in intellectual property fees from
Huawei over a number of years, helped by its charges of around 2.5% of the
smartphone’s retail price!
In recent years Huawei has made
a big effort to produce its own components or at least to avoid those supplied
by US companies. This is a very sensible move, and Huawei now produces its own
chipsets. Nevertheless, it remains vulnerable, as does China more generally, to
the US government using technology as a factor in its political and economic
influence in markets. Huawei is currently under fire from the US for allegedly
breaking its sanctions on Iran, by using US banks to transact with an Iranian
company and by selling Iran telecom equipment that included US components.
The US legal case against Huawei
has so far meant the house arrest of the company’s Chief Financial Officer in
Canada, and is still being played out. Nevertheless, in the meantime the US has
stepped up its actions against Huawei on a different front, one that from a
technology perspective is more critical. This is in the supply of the latest
generation 5G mobile network equipment.
5G innovation
Much to US concern, Huawei is
the leading supplier of 5G equipment worldwide. Last November, BT’s chief
network architect told a conference in London that there is ‘only one true 5G
supplier, and that is Huawei’, adding that the others ‘need to catch up’. A Financial
Times survey of the global mobile infrastructure market showed that in 2017
Huawei had a market share of 28%, Ericsson 27%, Nokia 23%, ZTE (another Chinese
firm) 13% and Samsung had 3%. All the others, including the US company Cisco,
had only 6% between them. The 5G network market is even more monopolised by a
very few suppliers, with Huawei much further in the lead, as the BT executive
indicated.
The hype around 5G and what it
can potentially do is avidly promoted by the major tech companies. They would
love consumers to ditch their ‘old’ equipment and move onto new, more expensive
devices, with the ever-so-exciting connections available on a 5G system. Just
imagine that amazing new 5G-enabled world of the Internet-of-Things, where, for
example, your driverless car runs over people you do not like and updates the
tally on your Facebook and Twitter pages!
5G would, nevertheless, appear
to offer – eventually – a much faster downloading speed, faster connections
between related devices and a greater capacity for handling many more devices
at the same time. All this sounds great until you remember that even 4G is not
universally available in the richer countries and that mobile network coverage
can be very patchy. The US barely makes it into the top 10 countries worldwide
for average Internet speed, and the UK is in a much worse position. It is even
less great when you are informed that 5G will require many more ‘base stations’
to build network coverage than 4G, because the 5G signals do not travel as far
as with 4G. That is the reality, together with the other very mixed blessings
in our present social system when we have 5G-enabled robotics, drones and so
forth.
How did Huawei get so prominent
in 5G technology? The standard western argument that Chinese companies make
technical gains by copying from established western corporations falls flat.
How does ‘copying’ put you in the lead in a new field? The
simpler, more accurate answer is that Huawei has for a long time invested a
huge amount in innovation. In 2017, for example, roughly 80,000 people, 45% of
its 180,000 worldwide staff, were involved in research and development. Some
are also employed in more than a dozen European R&D centres. Total company
R&D expenditure in 2018 was CNY101.5bn, roughly $14.8bn and 14% of annual
revenue.
It was more than a decade ago
that Huawei moved from low-tech operations, which sometimes involved it
reverse-engineering others’ existing products. Now, it plays a big role in
proposing new global standards for the latest mobile systems, and in 2018 its
scale of technical development was shown by how it applied for the largest volume
of patents ever – 5,405 – at the World Intellectual Property Organisation. It
is likely that in 2019 or 2020, China as a whole will for the first time exceed
the US in such patent applications.
Although patents are a form of
exercising monopoly power, and so are far from being a true measure of
invention or innovation, it is nevertheless striking that, back in 1993, China
filed for a grand total of just one patent with the WIPO. As another sign of
change, note the rankings of universities applying for patents. In 2018, the
University of California and Massachusetts Institute of Technology were first
and second, respectively, but Shenzhen University and South China University of
Technology came in at third and fourth.
… and Five Eyes politics
That China outcompetes with its own
technology is a little difficult for the US government to stomach, so it turns
to a tried and trusted ploy of citing ‘security’ concerns about Huawei. The
company is meant to be indistinguishable from the Chinese (communist?) government,
and using its 5G technology will doubtless enable Beijing to turn off your
fridge, cancel your order for beer and burgers and cackle like Fu Manchu as it
listens to your cries of despair.
One of the main political
weapons the US has in this respect is the ‘Five Eyes’ alliance. This is led by
the US, but includes the other stalwarts of the Anglo-American
political-economic system – the UK, Canada, Australia and New Zealand – who
cooperate with each other in signals intelligence, otherwise known as spying.
Set up at the start of the Cold War, the original focus was on the Soviet
Union. But it soon expanded much further into official and private
communications worldwide, as detailed by Edward Snowden, a former CIA employee,
in 2013.
The US has demanded that its
Five Eyes partners bar Huawei from participating in 5G networks in their
countries, due to security concerns. This follows from earlier moves by the US
to more or less exclude Huawei from the US market in the supply of other
technology, or in an ability to buy US companies. It has had some success. Back
in 2012, Australia had already banned Huawei from supplying equipment for its
national broadband network and it will continue with a 5G ban. New Zealand has
stopped Huawei from supplying equipment to a local telecom company, and Canada
may also do the same for its 5G network.
The UK is in a more mixed
position. BT has banned Huawei’s equipment from the core parts of its 5G
network, but other industry reports have suggested that security concerns can
be sorted out, with its equipment being used only in ‘benign’ parts of the
network that cannot be remotely accessed or which could not lead to the whole
system being taken down.
There are a number of problems
for each of the Five Eyes in going through with all this. Huawei is the
cheapest supplier, and is already entrenched in many 4G networks, so uprooting
its equipment is going to be very costly. Furthermore, they will all risk
retaliation from China in trade matters, something that may weigh upon the
Brexit-burdened UK more than the others. Finally, they have a problem when
there has been no evidence provided that there is any real security risk
– or at least none that is not already being addressed by the company – and that
this is anything more than a US-driven political ploy against an embarrassingly
successful Chinese company. This is why Germany and Japan do not seem to be
following the US ‘lead’ here.
It is true that Huawei’s
founder, Ren Zhengfei, was formerly a military technologist in China’s People’s
Liberation Army and that Huawei has received indirect support from the Chinese
state. But he left the PLA in 1982, five years before setting up Huawei. In any
case, if corporate-military-state links are such a problem, then why not look
at those between the US government, the military and security services and
companies such as Microsoft, Google, Amazon and others, both in terms of
lucrative contracts and intelligence sharing?
Or why not risk drowning in a
well of hypocrisy and note two other issues? First, a report by the New York
Times detailed how the US National Security Agency (NSA) hacked into
Huawei’s systems from 2007:
“One of the goals of the operation, code-named
‘Shotgiant’, was to find any links between Huawei and the People’s Liberation
Army, one 2010 document made clear. But the plans went further: to exploit
Huawei’s technology so that when the company sold equipment to other countries
– including both allies and nations that avoid buying American products – the
NSA could roam through their computer and telephone networks to conduct
surveillance and, if ordered by the president, offensive cyberoperations.” (22
March 2014)
Second, as reported by Der
Spiegel, the NSA has made its own ‘backdoors’ in many makes of computer and
telecom software and hardware: “A document viewed by SPIEGEL resembling a
product catalog reveals that an NSA division called ANT has burrowed its way
into nearly all the security architecture made by the major players in the
industry – including American global market leader Cisco and its Chinese
competitor Huawei, but also producers of mass-market goods, such as US
computer-maker Dell” (29 December 2013).
With all communications
technology, there is a potential problem of access or interference by
outsiders, whether they be state spies or private players. But in the case of
Huawei, the US has not given any evidence that the company has given special
access for the Chinese state to its technology and, of course, it ignores its
own infiltration into communication systems used worldwide.
How vulnerable is Huawei to
US-inspired sanctions?
The US is a very big market, so
it is not good news for any company to be excluded from it, and it is even
worse when the US government can exert political influence on a company’s
access to markets elsewhere. Huawei is vulnerable in these respects to
US-inspired sanctions, but it is worth noting some unusual features of the
company that limit its vulnerability.
First, Huawei is owned by its
employees, who hold all the shares in the company.
It is not quoted on any stock exchange, which prevents a market crash in the
share price from destabilising it, and this also helps protect it from being
taken over. Second, Huawei does not have much reliance on outside financing. In
2018, its outstanding long-term borrowings amounted to $9.7bn against a net
profit for that year alone of $8.7bn. This looks pretty good compared to
Apple’s long-term debt of $93.7bn versus a net income of $59.5bn for its 2018
fiscal year.
Huawei’s 2018 annual report
showed a solid near-20% growth in revenues, and that just over half its
business came from China. Europe, the Middle East and Africa (EMEA) was the
most important foreign market region, with 28% of the total, while the Asia
Pacific region was at 11%. The Americas – both North and South – accounted for
less than 7% of Huawei’s total business revenues.
Huawei’s global sales
revenues
(Divide the 2018 data by 6.856
to get the equivalent US dollar number)
Ironically, the longstanding
anti-Huawei prejudice of the US government prevents it from doing much more
damage to the company, unless it can force its European allies to follow suit.
I have found no data for the split of Huawei’s EMEA region revenues between
western Europe and Africa, but the company’s record of providing low cost
technology to many African countries, together with it doing far more training
of locals than any other western company, will no doubt make it difficult for
the US to dislodge Huawei in those locations.
Conclusion
China presents the most
significant challenge to America’s domination of the world economy. A very big,
very poor country that was making cheap goods for the US domestic market was
fine for the American ruling class for a while. Now China presents a more formidable
problem of making gains in the field of technology, one that has been an
important area monopolised by American businesses. This is shown by how the top
four companies in the world by stock market capitalisation are US tech giants:
Apple, Microsoft, Amazon and Google. The only non-US companies in the world top
10 are Chinese: Alibaba and Tencent Holdings. Huawei does not figure on that
particular list, but is nevertheless making dramatic gains in its chosen
fields. Other big Chinese tech companies include Baidu, ZTE, Xiaomi and Oppo.
The US is big on widely used
software, Internet search, social media, e-commerce and cloud computing
(Microsoft, Google, Facebook, Amazon) and on selected areas of critical tech
products (Intel chips, Qualcomm modems, etc). But it is relatively weak in
others – especially network infrastructure, as reflected in the poor Wi-Fi
coverage in much of the US. It has also earned a lot of revenue from licensing
its intellectual property to foreign companies: in 2017, US net revenues on
this item amounted to a not insignificant $77bn, although that was down from
$89bn four years earlier.
Prospects for the US do not look good here, given not only the rise of China,
but also the growing prominence of companies like Samsung of Korea and SoftBank
of Japan who are joining the innovation-via-takeover race that has up to now
been dominated by the US tech giants. These trends will only add to America’s
anti-China protectionism.
Europe’s response to China has
been a little different, as noted earlier in the mixed reaction to the US call
to ban Huawei from 5G installations. It was not only an ability to see through
US hypocrisy, helped by the knowledge that the NSA had tapped German Chancellor
Merkel’s phone for years. More fundamentally, there is an ambivalent stance,
both because Europe is way behind in the Big Tech stakes and does not want to
depend only upon US companies, and because China is a major trading partner for
the EU – the third biggest market for EU exports, after the US and Switzerland,
and the biggest source of imports.
But perhaps one guide to
Europe’s response to the tech challenge from China is seen in what the EU Trade
Commission did in 2012-13. It launched an anti-dumping investigation into
Huawei and ZTE, alleging that the Chinese companies were being subsidised by
the government, which enabled them to undercut European tech company prices. It
demanded that Huawei and ZTE had to increase their products’ prices by 29% and
urged the Chinese government to guarantee a 30% market share for European
companies in the Chinese market. In the end, this failed to get enough support,
even from other European governments, and the anti-dumping action was later
dropped.
There is much more to come in the
US-China story, and in the role of China in the world economy. President Trump
will no doubt declare victory in any trade negotiations, but America will
remain anxious about a growing threat to its rule.
Tony Norfield, 16 April 2019
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