An important but somewhat obscure element of the trade battle with China in the 5G era is the role of setting technical standards. Standards have been described as the “connective tissue between technology (and its use) and the market, providing specifications for products, services and systems.” Which companies, including those owned by the state, are successful in getting their approach to new technologies adopted on a global basis have the early mover advantage. This is especially important for 5G since it is the crucial enabler for other crucial new technologies such as artificial intelligence (AI), autonomous vehicles, and the internet of things (IOT). The U.S. took the lead in 3G and 4G systems, enabling domestic and allied firms not only to dominate the telecommunications infrastructure, but also to pioneer new applications. This advantage was effectively exploited by firms like Google, Facebook, Uber, PayPal, and Amazon. However, U.S. export controls enacted to combat the malign influence of Huawei, especially in compromising national security and privacy, are greatly complicating and weakening the ability of U.S. semiconductor, radio network, and software firms to work in international standards organizations to promote adoption of their 5G technologies.
China has devoted considerable resources to winning adoption of its preferred standards. Often its tactics violate international norms and practices in international forums such as the 3rd Generation Partnership Project (3GPP) which develops protocols and rules for the telecommunications ecosphere. China is increasingly active in other standards bodies such as the International Standards Organization (ISO) and the International Electrotechnical Organization (IEC).
The Middle Kingdom uses three related strategies to win adoption of its preferred technical standards and promote domestic technologies. First, it develops indigenous standards using its growing economic size to achieve the economies of scale needed to ramp up production of new technologies and compete internationally with those from foreign firms. Second, it tries to export its own standards by sending large squads of company engineers and government officials to international standards-setting meetings, where decisions are normally made by consensus. U.S. firms can generally send only a limited number of representatives due to the costs involved. Third, it compels adoption of its own standards in countries benefitting from the largesse of the Belt and Road program, which serves as an outlet for Chinese overcapacity, while extending its political influence and economic control over countries stretching across Asia to Europe and across the oceans to Africa and Latin America. China is also maneuvering to set up a competitive “Asian Standards Organization” to compete with the ISO, the IEC, and the 3GPP. This tactic is similar to its establishment and promotion of the Asian Infrastructure Development Bank, which helps fund its Belt and Road projects and competes with the World Bank.
For most of the post-war period, the United States and Europe have been leaders in winning acceptance of standards which are developed by their companies, in large part of course because they had the most research-intensive economies. Europe still chairs a plurality of the technical committees in the ISO and the IEC, and the U.S. has been successful in setting fundamental telecommunications standards starting with 3G systems. But the aggressive Chinese effort threatens their leadership position. For example, in recent years China has submitted 40 percent of all proposed 5G standards at the 3GPP meetings, although many are of poor quality.
The impact of U.S. export controls on Chinese firms ZTE and Huawei is however beginning to endanger U.S. leadership in 5G. This deterioration also affects other advanced technologies such as cybersecurity, AI, IOT, and quantum computing, to list just a few.
The economic impact of export bans is potentially significant. The U.S. semiconductor industry, for example, represents almost half of global market share, but China now accounts for 34 percent of all semiconductor purchases. If the U.S. is unable to win acceptance of standards enabling its technology leaders like Qualcomm, Intel, Micron, Qorvo, and others to retain their global markets in China, American companies will be seriously undercut. Huawei threatens to jettison use of all U.S. parts in 5G phones and potentially use its dominant market share in China and in an increasing number of other countries to undermine the ability of U.S. firms to finance their huge investments in fundamental research which allows them to excel at innovation.
The U.S. export control regime, additionally, is severely hampering the ability of U.S. firms and engineers to even participate in the technical work leading to new standards. In May Huawei was added to the Bureau of Industry and Security’s (BIS) “entity list,” which forbids exports or transfer of products or technologies to countries that are on its control list. A serious consequence of this ban is that U.S. companies or their representatives are unwilling or unable to participate in standards-making activities. This is because they are at risk of criminal prosecution if they exchange information in a forum in which sanctioned parties like Huawei are present. This ban can include casual conversation, exchange of technical notes, emails or formal discussion of technologies involved in the standards discussion. The problem of course is not limited to 5G discussions, since any activity involving interaction with an entity on the BIS export control list is subject to the same restrictions. BIS has recognized the problem by granting a temporary license in late May for companies to engage with Huawei “as necessary for the development of 5G standards.” Nonetheless companies remain unwilling to take the risk of criminal prosecution with an ill-defined and temporary exemption. Qualcomm is requesting a permanent exclusion for the implicit ban on participating in standards-making activities for 5G and other cutting-edge technologies subject to export controls.
Balancing the need for protecting national security, especially for technologies with substantial economic potential and political sensitivity such as 5G, is a difficult task. A growing number of experts, starting with former Google CEO Eric Schmidt, are resigned to gradual “decoupling” of the internet and more generally the information and communications sectors into two spheres: one dominated by China and another by the U.S. and its allies. But given the enormous size of markets in the Chinese sphere, and its aggressive efforts to expand it, the economic impact of such an outcome would be costly to U.S. technology firms. Semiconductor companies devote over 30 percent of sales to capital investment and R&D, while 5G leader Qualcomm invests over 26% of sales revenue in R&D alone. Without the scale advantages of participating in global markets, especially in the Asia, the ability to invest to maintain leadership is jeopardized.
Given these realities, serious national attention is needed to find creative ways of protecting vital national security and related privacy interests. The conversation must include the private sector, and all elements of the Federal government that have some impact on the problem. For 5G this includes not only the Commerce Department (with its National Institute of Standards and Technology, National Telecommunications and Information Administration, and BIS), but also the National Science Foundation (important to basic research), the Department of Defense, and the Department of Justice. Additionally, the State Department and the U.S. Trade Representative must work with allies on joint approaches to Chinese misuse of standards and take action at the World Trade Organization when China violates its obligations for using nondiscriminatory standards. Central coordination and leadership from the White House is badly needed to give coherence and vitality to this project.