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 import 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







