Among the world’s 20 largest internet companies by market capitalization, 11 are American and nine are Chinese, and the Chinese giants are proliferating fast, up from two just five years ago. Currently, they are limited largely to Chinese turf. Tencent and Alibaba get more than 90% of their traffic from within their home country, compared with roughly 10% for Google and Facebook, but they all have plans to expand.
The Trump administration has moved to restrict Chinese tech expansion in several ways. An executive branch committee that reviews investments for security threats recently blocked attempts by a Chinese company to buy MoneyGram, a money-transfer company. In another case, that same committee’s concerns about potential Chinese influence over global mobile networks helped scuttle Broadcom’s proposed takeover of the chip maker Qualcomm. When the Trump administration banned exports to a major Chinese smartphone manufacturer, ZTE, it forced the company to largely shut down for lack of access to key American technology.
Trump was willing to lift the ban on ZTE after the company paid a $1 billion fine and fired its top executives, but Congress was not. The Senate voted to reinstate the ban, which is likely to fuel trade battles to come. When I was in Beijing, many Chinese were talking about how the humiliation of ZTE was inspiring an official push to reduce China’s dependence on the United States for semiconductors, software and other critical tech imports.
The next salvo from the Trump administration is expected to focus on sensitive sectors like financial technology and artificial intelligence, and to impose new controls not only on American tech exports to China, but also on American investments in China. Many Western allies have already taken similar steps. Germany is tightening investment rules for Chinese companies and protesting the restrictions German companies face in China. Australia is reportedly considering banning Chinese firms from working on its 5G rollout because of national security concerns.
The European Union recently imposed new data protection rules written largely to give consumers more control of information now in the hands of corporate giants like Facebook, but also to guard against the spread of a China-like surveillance state. The European Union is also pondering a new digital single market, in part to give European companies a market in which they have a chance to grow as large as Chinese rivals.
Meanwhile, many countries are going the opposite way, copying elements of China’s external barriers and internal surveillance tools: Russia, Brazil and other countries are requiring foreign internet companies to put servers on those countries, where they are easier for the government to monitor and control. Qatar, Iran and the United Arab Emirates, among others, have banned foreign services like WhatsApp and Viber. These moves may be motivated by a desire to control political discussion more than trade, but nonetheless they invite retaliation.
This is how a digitally interconnected world could die by a thousand cuts, and technoprotectionism may get a further push during the next global downturn. From the United States to Europe and Japan, public debts are high and deficits are rising, which means these governments are poorly positioned to spend their way out of any slowdown. Central banks can’t help much, either, since interest rates are still very low, with little room or reason to drop further right now. In this environment, governments may see protectionism as the only lever they have left to pull.
For most of the postwar era, the consensus in support of free trade was so strong that governments rarely resorted to raising tariffs even when times were tough. The trade wars that broke out after 2008 have involved mainly nontariff or “stealth” trade barriers, including cheap state loans and subsidies for favored industries. But in the last two years, the rise of Trump and other antiglobal populists has given new currency to protectionism in all its forms, including technoprotectionism.
The global financial markets had largely ignored the brewing trade battles, until recently. As the tariff threats grow in scale, and the battleground shifts from rust belt industries to new technologies, the markets are growing more skittish. So far, stocks have been hit harder in China than in the United States, but there will be no winners. The latest surveys of American investors and manufacturers show that their biggest concern is the threat of a trade war.
The risks from deglobalization are growing. If the current skirmishes turn into a full-blown trade war, blame will fall heavily on the thousandth cut. But the real fault will lie with the 999 that came before.