Why the US Campaign Against Huawei Backfired

Close observers of the conflict between the U.S. and China over the Chinese telecom firm Huawei have sometimes noted how the effort to coerce and damage Huawei has in fact imposed equal or even greater costs on the United States. In addition, the Trump administration’s efforts are frequently confounded by the actions of allies and the firms of allies, as well as numerous other important nations and firms, so as to undercut U.S. objectives. Aside from vague allusions to a “hyper-connected world,” there has been little effort to explain these results and predict the persistence or waning of these patterns.

This situation is very likely to continue and even intensify, meaning there is very little chance of success for the current U.S. policy. Further, these outcomes are primarily the result of a global system characterized by complex and deep interdependence in economic, political, and security relationships. In addition, the potential damage to this global system from U.S. policies is large, especially from the foolhardy notion of decoupling the U.S. and Chinese economies.

Unintended Consequences

There are numerous examples of unintended, unwanted, or unexpected consequences for the Trump administration in its confrontation with Huawei and/or China. Some can be attributed to China’s significant power and resources to counter and resist U.S. actions. But of equal or greater importance is the deep interdependence of the global system. The complexity and intensity of connectedness in the system is responsible for the shared losses (and gains) and generates events often with little resemblance to the intentions of even the greatest of powers.

Examples of costs and unintended events are considerable.

First, the United States has had limited success in implementing the ban on sales to Huawei. This company has been able to switch suppliers for many of its smartphone components since the cutoff of U.S. suppliers by the Trump administration. Many other essential components previously sold to Huawei by U.S. firms have been replaced in whole or in part by suppliers from Taiwan, the Netherlands, France, Italy, and Japan. Huawei has also had success in turning to Russia and Japan to rebuild its connections to global knowledge networks.

The high costs for U.S. firms, along with objections from the Defense Department, have produced powerful political resistance and pushback, compelling the Trump administration to provide waivers and repeatedly loosen the May 2019 ban on U.S. sales to Huawei.

In addition, in a remarkable concession to the global process of standards setting, particularly knowledge sharing and cooperation, the U.S. Commerce Department has reportedly developed rules that would permit U.S. companies to work with Huawei to develop standards. U.S. policies of cutting Huawei off from U.S. firms meant these same firms were very hesitant about engaging with Huawei in creating the protocols and technical specs needed for the standards setting that permits interoperability in different systems. The result was Huawei’s growing importance in developing standards and an enhanced competitiveness that threatens U.S. technological leadership.

New U.S. proposals to restrict Huawei access to U.S. firms threaten to considerably damage both the United States and China. Damage to U.S. firms will come from losing Huawei as a customer and from Chinese government retaliation (for example, denying U.S. telecom companies access to the Chinese market). The global technology ecosystem in telecoms will be disrupted and innovation slowed, with blame falling on the United States. The idea of restricting Huawei’s access to the advanced semiconductor chip industry in the U.S. also will surely damage U.S. firms, provide China with powerful incentives to develop a national chip ecosystem, and further undermine the competitive advantage currently enjoyed by the United States.

Meanwhile, several important U.S. allies have been more moved by the incentives of deep interdependence than by the pressure tactics of the Trump administration. Resistance to banning Huawei from national 5G systems has come from U.S. allies and other important advanced nations like the U.K., Germany, Switzerland, France, Norway, Italy, and India.

There also have been growing fissures in U.S.-Japan relations caused by Trump rhetoric coupled with improving relations between Japan and China. Despite a much-hyped recent policy move, Japan does not subscribe to the strategy of wholesale decoupling from China, because its economic, political, and security interests are deeply connected to China. Indeed, the pandemic crisis has led to a further improvement in relations between Japan and China.

The Perils of Non-Cooperation

Why is it that even a government as powerful as that of the United States is unable to impose its will on a single technology firm without triggering such costs? The answer lies in the system of deep and complex global interdependence that the United States itself did so much to construct from the 1940s onward. Composed of tightly coupled global networks of trade, production, knowledge, innovation, finance, regional and global institutions, and security, this global order generates strong incentives to engage in cooperation and equally strong disincentives to avoid non-cooperation. The global system generates shared benefits for cooperation, shared costs for non-cooperation, and opportunities to elude efforts to coerce non-cooperation.

The great depth and complexity of interdependence not only sustains widely shared economic growth, innovation, and a relative peace, but also gives rise to periodic crises that rapidly spread pain across the system. As a result, the great powers have strong interests in defining and enforcing rules and institutions – whether formal or informal, bilateral or multilateral – to govern the system and cope with crises when they arise.

The need for systemic governance and management accentuates the importance of structural power, which is the ability to shape preferences about global rules, standards, norms, and systemic outcomes. Mostly, this shaping comes through the creation of systemically vital resources and not from coercion. The role of the dollar as the global key currency, the U.S. financial system as primary source of global investment and lending, the global role of the Federal Reserve in monetary policy, the central role of the United States in creating knowledge and promoting innovation, and the U.S. capacity for the creation and preservation of a global commons are examples of structural power and convey influence through the global system of deep interdependence.

U.S. positions of strength are overwhelmingly found in the many elements of structural power and the links between this power and deep interdependence, although China’s structural power is increased by the Belt and Road Initiative and the size of its domestic market. At the same time, structural power flows toward nations taking a leadership role in defining and managing the system, and this power is dissipated when nations like the United States abjure such a role.

As famously noted by economist Albert Hirschman, great powers find it very difficult to successfully coerce other great powers in a context where gains and losses are shared in roughly equal degrees. This is especially true when the strategic losses of the coercive state exceed the losses of the coerced state. The events we have described relating to U.S. actions toward Huawei are examples of the unavoidable disincentives that come from non-cooperation in a global system of deep interdependence. U.S. policies also create the potential for cumulative forms of non-cooperation to erode the connectedness of the system and thereby damage the efficiency and capacity for innovation and growth that derives from deep interdependence.

The nature of the strategic interaction between the United States and China, especially economic and military competition, is also greatly influenced by complex and deep interdependence. A state possessing structural power exercises influence over other states by virtue of the incentives and disincentives arising from interdependence. For example, Chinese interest rates tend to follow those defined by the U.S. Federal Reserve, not because of coercion but because there are inherent gains and losses provide incentives to so act.

Similarly, the very high knowledge intensity associated with innovative and advanced products operates within a global system of knowledge sharing and interdependent investment, development, and production. Knowledge increases in value when shared and recombined in innovative ways. Aspirations to knowledge and innovation autarky will invariably fail. Chinese- and U.S.-based knowledge often benefits each side, mostly in unpredictable ways. Losses in such a world typically come from being unprepared to use, integrate, and rework knowledge developed elsewhere. The diffusion of knowledge has now advanced to such a degree that even the most advanced technologies – for example AI – see innovators located in a multitude of nations as important participants.

The proposals for decoupling the U.S. and Chinese economies ignore the knowledge and other forms of interdependence in AI and the cooperation between U.S. researchers and those from many other countries, including China. The deep security interdependence between the United States and China means the two nations will need to engage in multiple forms of cooperative dialogue in order to manage the security implications of new military applications of AI. Anything resembling a shutdown of the channels of cooperation will damage the U.S. ability to tap into China’s emerging role as a major source of knowledge and technological innovation.

Does the rejection of the failed Trump policies mean the United States cannot hope to alter any Chinese policies thought to violate acceptable competitive norms? Given that tariffs and cutoffs invariably lead to negative results and reduce leverage in negotiations, it is difficult to see any valid strategic reasons for continuation. Many have argued the U.S. policy of engagement has failed, but this is only true if the standard of success is regime change in China.

There are two areas in which a different U.S. policy can yield significant gains: deep engagement combined with a coordinated and well-funded effort to enhance U.S. competitiveness. Both actions are consistent with and likely to strengthen deep interdependence, and will enlarge U.S. influence with China, expand U.S. competitiveness, and increase U.S., Chinese, and global economic growth.

Deep engagement comes from a U.S. organized effort to build a broader consensus on the rules for the global system that involves the legitimate preferences of important emerging economies, including China. A strategy for building U.S. competitiveness should leverage open standards and open systems and an open economy as a basis for a shared global prosperity. All other alternatives lead to greater conflict, fragmented systems, lower growth, and disrupted innovation. A liberal global order, seeking to integrate and accommodate various global interests and not simply enforce hard-right U.S. preferences, can preserve peace, economic growth, and a more equitable global distribution within and among nations.