The Tech Schism

One of the key events in the rupturing of relations between the USA and China was a speech by Vice President Mike Pence in October 2018 at the Hudson Institute, which was breathtaking in its hostility to China. The speech was followed two months later by the arrest of Meng Wanzhou, chief financial officer of Huawei, in Canada at the bequest of the Trump administration. At this point, the fracturing relationship between the US and China begun to also run through the global technology industry.

The Trump administration’s policy towards China was a rare example of them fashioning and then leading the consensus across the American political, industrial and military complex. Many corporate leaders in the US who disdained the style and content of Trump’s politics in general, were glad of his scolding of China, and to a large extent felt that a watershed had arrived in this relationship where China would no longer ‘import’ innovation from the West in return for exporting deflation.

On their side, Chinese policymakers, many of whom had studied and lived in America in order to better understand it, only to be confronted by an untypical American leader, also felt that a watershed had arrived – China is a now a world power and needs to assert itself. Indeed, since that period, China has managed to aggravate most of its neighbours across Asia (skirmishing with India troops, haranguing Australia and provoking Japan for instance).

In that context, China’s (over) reaction to Nancy Pelosi’s visit to Taiwan, is itself a watershed. They might very easily have dismissed this event as showboating by a publicity hungry Western politician but didn’t.

The military led response betrayed much about Xi Jinping’s leadership, China’s reading of its military readiness and regional standing. The side-effect will be an acceleration in the game-theoretic scenarios around a Taiwan centric geopolitical contest. I am not an expert here so will leave the framing of this to others, save to say that as we posited a couple of weeks ago, Taiwan will now feature more prominently in thriller scripts (Thriller in Tanegashima).

From an economic and strategic point of view, what Pelosi’s visit does, following the Huawei thread, is to bring governments and technology companies closer together (appropriately her husband Paul’s trading record in tech stocks is second to none!).

The semiconductor industry is a good example. In recent weeks Taiwan’s MediaTek and Intel have signed a production agreement, the US has passed the CHIPS Act which encourages semiconductor chip manufacturing in the US, and forces overseas technology companies (e.g. Samsung and SK Hynix) to choose the US technology marketplace over that of China. Meanwhile China’s SMIC has reportedly made advances in its chip technology (this is one sector where China badly lags the west).

The great schism of globalization now means that technology companies (especially those in sensitive areas) need to choose sides. This is likely to be the same for consumer brands like Nike and Apple, though perhaps not for French brands who can pretend not to care.

There are several ways in which technology companies are becoming closer. Several American data, internet and communications companies have actively helped Ukraine, the same is true of the US cybersecurity community. Notably the invasion of Ukraine is reconfiguring the techno-defense industry, across the US and Europe.

Drones, AI, signals, space war (recall Trump’s SpaceForce), railguns and robotics are just some of the emerging fields in defense research and development, at a time when world defense spending is hitting a record USD 2.3 trn. The arms race has taken on a new, intensely tech driven aspect – we only need to read scenarios of what a South China Sean naval battle might look like (hypersonic missiles, lasers, cyber-attacks).

Away from the battlefield, in general, across the three large regions, technology companies at the centre of strategic activities are being drawn closer to their governments, and in some cases are spending more on lobbying them. A race is on, not just to build lead edge technologies, but to also lea ahead in setting the standards and norms that oversee them.  

In that light, regulation of technology and data is also becoming more region specific, to the extent that the activities of say Chinese companies in Europe and the US are becoming more problematic.

Other, newer technologies are witnessing this too. For example, one of the key battles in finance is between crypto centric defi (or decentralized financial networks) and the old fashioned’ financial world. The withdrawal of liquidity by an ‘old’ institution in the form of the Federal Reserve, has triggered a collapse in parts of the crypto world, where many exchanges have failed and the entire crypto exchange sector is being investigated by the SEC. To a large extent this effort is aimed at limiting fraud and bad behaviour, but there is also a strategic element, gaining control over the ‘defi’ world.

The ‘metaverse’ may well see similar treatment. Though it exists beyond our real world, the companies that are creating it ‘Facebook/Meta’ are well grounded in the public policy and affairs of the ‘old world’.

So, while the outburst of Chinese nationalism (expect more of this) is the manifest effect of around the Pelosi visit, the event is now just one of many that will see a world where technology – in its innovations, initiatives, regulation – also becomes more regional.

Have a great week ahead,

Mike