In the brewing trade war between the United States and China, silicon and software matter more than steel.
The Trump administration’s tariffs on imported metals seem like a great way to tick off friendly nations like Japan and Germany. The tariffs could ultimately kill more jobs than they save, and in any case they only amount to less than $10 billion. Besides, very little imported steel comes from China.
But on Tuesday, the president unilaterally blocked what would have been the biggest merger in the history of tech: Broadcom Corp.’s $117 billion hostile takeover of San Diego-based chip maker Qualcomm Corp.
As with the metal tariffs, the president said he was motivated by reasons of national security. But this time, I think the president has a point. Qualcomm is one of the most important companies in America, the primary innovator in wireless communications technology. We can’t afford to hand this critical American industry over to China.
But wait — Broadcom isn’t Chinese. It’s based in the tiny Asian city-state of Singapore. And as part of its bid to win over US regulators, Broadcom said it would relocate its headquarters to the United States, where it was born back in the 1990s. So the merged companies would be fully under American control.
So what’s all this got to do with fending off China? The administration fears that under new ownership, Qualcomm would slash its research and development efforts, especially in the field of 5G wireless data networks. It’s not an unreasonable fear; Broadcom has a track record of boosting its profits through relentless cost-cutting.
For instance, in 2016 the rest of the chip industry was infatuated with putting smart chips into everything. But Broadcom sold off its Internet of Things chip-design business, boosting earnings and keeping the company focused on its core businesses.
As an Internet of Things skeptic myself, I sympathize. But there’s something to be said for frittering away money on leading-edge tech that may never amount to much. Every now and then, it pays off in a big way.
It has worked out that way for Qualcomm. The company led the way in developing the 3G and 4G wireless services that let us carry video games and high-definition movies in our pockets. And Qualcomm is leading in the development of 5G, the new wave of wireless services that are supposed to let our mobile devices swap data by the gigabit, as fast or faster than today’s best home Internet services.
“Qualcomm essentially invented this field and has stayed ahead of it as the number-one provider,” said Derek Scissors, a China trade specialist at the American Enterprise Institute, a right-leaning think tank. If the company were to falter under penny-pinching new management, China would be ready to pounce.
Huawei Technologies is already the leading maker of the back-room gear powering the world’s cellular networks. But because of its Chinese roots and its close ties to that country’s military establishment, US firms have refused to buy Huawei gear. After all, a Huawei router installed inside a US telecom carrier could secretly share US phone traffic with Chinese spies. It’s the sort of thing our National Security Agency has been doing for years, and one could hardly blame the Chinese for trying.
America is so dismayed by the Huawei threat that we’re not even letting the company sell its cellphones here. AT&T Inc. backed out of a marketing deal with the company in January, after a bit of federal arm-twisting. It didn’t help that in 2016, some cheap Chinese cellphones, not made by Huawei and sold through Amazon.com, were found to be secretly transmitting the users’ personal data to a company in Shanghai.
But the Trump administration would probably object to Huawei phones even if it didn’t fear spying. It’s just as eager to prevent American dollars from subsidizing the company’s bid to play catch-up in 5G.
Trump’s smackdown of the Broadcom-Qualcomm deal may finally focus our attention on the administration’s crusade to keep American tech out of Chinese hands. Presidents rarely bar international deals on national security grounds. Trump has already done it three times.
In January, he prevented a Chinese financial company from buying the money-transfer network MoneyGram, because it might have provided the Chinese with vast amounts of sensitive digital data about US citizens. And last year, the administration blocked a Chinese purchase of Lattice Semiconductor, an American maker of high-performance chips widely used in military applications. It’s all aimed at ensuring that if China draws even with the United States in tech, it will have to do it the hard way.
As an instinctive free-trader, I don’t have a problem with other nations out-innovating the United States. But I make an exception for China, a police state with an undisguised contempt for human rights.
Our own country, which has sometimes abused its leading role in global telecommunications, at least grants that people have a right to privacy. China doesn’t even recognize the principle. So I’d just as soon not have their companies dominating the communications systems of the future.
Who builds our networks matters a lot more than who pours our steel.Hiawatha Bray can be reached at email@example.com. Follow him on Twitter @GlobeTechLab.