In an interconnected world, the supply chains of every significant industry rely on the unimpeded flow of information to coordinate activities. Thus, the greatest physical and financial effects of the US-China trade war almost certainly are playing out in the acceptability (allegedly for security reasons) of the Chinese telecom giant Huawei’s equipment. This includes both network infrastructure and smartphones and other devices (including machine-to-machine “Internet of Things” devices) connecting to the networks. Huawei is second (to Samsung) in global smartphone market share, and is experiencing steady growth in this statistic, unlike rivals Samsung and Apple. It is the market leader in wireless network equipment, ahead of Nokia, Ericsson, and Cisco.To recap, in August 2018, the US banned the use of Huawei components in US telecommunications networks (although implicit bans had applied since around 2008). US ally Australia quickly followed suit. In November, the New Zealand Government Communications Security Bureau (GCSB) declined to approve the use of Huawei equipment in major mobile operator Spark’s proposed 5G network (not strictly a “ban,” but having the same effect). The UK and Germany initially adopted a more nuanced approach, with the former’s National Cyber Security Centre reportedly finding the alleged security risks of deploying Huawei equipment “manageable.” However, it appears that under new political leadership the UK is revisiting the issue and may ban Huawei following Brexit. And while in June President Trump may have softened his stance by allowing some sales by US manufacturers to Huawei, there is no reciprocity for Huawei sales into the US.
Politics, politics
Few would deny that the Huawei issue is overtly political, with US defense and security allies undoubtedly facing considerable pressure to come into line with the US policy position. (While the Minister responsible for New Zealand’s GCSB claims it is not a political issue, what he means is the Spark decision was not a partisan one, as the denial for permission to use Huawei kit was made under legislative delegation by a Crown Entity at arm’s length from the Minister, and not by the Minister overseeing the delivery of a particular party policy. Ultimately the Minister is accountable for GCSB actions so the matter falls into the political — and not commercial — sphere.) Failing to follow the US line invokes potentially significant sanctions.
Membership of the “Five Eyes” intelligence alliance places special political pressure on Australia and New Zealand (who along with Canada, the UK, and the US make up the group). While historically and politically part of the “western alliance,” in the past thirty years they have undergone economic transformation from a western to eastern orientation. China is now the major trading partner of both countries. This is hardly surprising. Geographically, both countries are arguably part of the Asian region: Beijing is just over half the distance from Australian capital Canberra that Canberra is from Washington DC, and the Australian city Perth is closer to Singapore than Boston is to Los Angeles. Furthermore, New Zealand was the first western country to enter into a free trade agreement with China.
Quite simply, Australian and New Zealand political leaders must decide whether they will prioritize US-driven political considerations over local economic ones, which unequivocally rest with China, and by implication, Huawei.
The economy fights back?
Australia has already effectively opted to come in behind the US. The first major casualty has been the promised fourth mobile network: entrant TPG was going to use Huawei equipment to build its network but has been forced to can its plans. However, the costs to competition — and therefore consumers — do not stop there. Frontier Economics has projected that removing Huawei as a competitive supplier will lead to increases of between 14 and 42 percent in the prices of 5G radio network equipment and between $700 million and $2.1 billion in extra costs in deploying the country’s 5G networks. Furthermore, rollout of the networks will likely be slower, the networks will be of lower quality, and reduced network diversity will reduce consumer choices in all networks, devices and applications. There will also be switching costs for operators using Huawei equipment in their 4G networks (Vodafone and Optus), as the firm is unlikely to offer favorable terms for repairs or network upgrades. Australia’s vibrant and dynamic mobile market, which has delivered annual price reductions of 4.2 percent per annum since 1998 and the 5th highest mobile penetration in the OECD, is under threat. The additional costs will flow through to all sectors of the Australian economy relying on mobile services in their production and consumption.
Despite the political obfuscation (likely to try to deflect accusations of political breach of the free-trade agreement), the New Zealand situation appears little different, albeit that economic counter-pressure may be ramping up. A letter to the GCSB and Communications Ministers from Huawei NZ Managing Director Yanek Fan — leaked to the media this week — warns that it is “arbitrary and capricious” to single out the company under a “country of origin” approach when others involved in 5G technology have links to China. (Cisco, Ericsson and Nokia are all engaged in joint ventures with Chinese firms.) The letter also notes that “there is a real risk that Huawei New Zealand may not be able to continue to operate in the New Zealand market” if the effective ban persists. Withdrawal of the firm would have significant ramifications for both the fixed and mobile markets: two of the three government-subsidized UltraFast Fiber Broadband (UFB) network operators use Huawei equipment, as do two of the three mobile operators (Spark and entrant Two Degrees, which brought much-needed competition to the market). Frontier Economics estimates 5G cost inflation of the order of 15 to 35 percent if Huawei does not have a part to play. It appears Huawei was able to supply UFB equipment because the Act empowering the GCSB to vet network plans was not passed until 2013, some three years after the UFB tenders were let.
Politics trumps economics?
Ultimately, the outcomes of the US-China trade war appear to be shaped by the forces of international geopolitics and not local economics. Tough decisions need to be made by political leaders, and casualties will inevitably be caught in the crossfire, as no war is costless. Nonetheless, it begs the question of whether US mobile prices might have been lower, and product choices wider, had Huawei not been banned from US network deployment.