How the US-China Cold War is spreading to tech

By Peter Keenan, CEO and Co-Founder of Apexx Global

With US-China relations at an all-time low and the rapid escalation of the Trump administration’s attacks on Chinese companies, the battles lines for the new ‘tech cold war’ are being drawn. While companies such as TikTok and Huawei are at the epicentre of this deepening conflict, US policy has actually gone further to limit access to all manner of Chinese technologies as well as stifle Chinese companies’ ability to find markets in America, by citing issues of data privacy, security and unfair competition. Recently, the US has targeted supply chains to Chinese tech giants, in particular their access to chips, barred transactions and regulated the undersea cable network on which global telecommunications depend.

America’s policy aims to restrict the flow of technology to China, restructure global supply chains, and drive investment into new domestic technologies. Even if, as polls indicate, a new Biden administration comes to power next year, the US approach to Chinese technology firms is unlikely to soften. However, China’s tech companies have grown so large in recent years, that they present a plausible rival to the US in many sectors, in particular in areas such as mobile and digital payments.

The role of data and the internet is a critical front in this war. Many have raised the prospect of a two-track internet or “splinternet” emerging, one led by the US and one by China.  Data will play a key part in the scale of any kind of fracturing of the global internet that we use today. In fact, the split in the global internet can be seen already. For years, China has blocked American technology companies such as Google and Facebook from operating domestically. That has allowed domestic champions to flourish, such as China’s answer to Amazon – Alibaba-owned Taobao or JD.com, WeChat instead of WhatsApp, and AliPay instead of Visa and Mastercard.

As Chinese technology companies increasingly seek to expand their presence abroad, this fight for data and the internet will only intensify, forcing countries caught in the middle to pick sides. Indeed, China’s Belt and Road Initiative, a hugely expensive and expansive global infrastructure programme, means many nations are indebted to China, quite literally, making it easier to win allies overseas.

Alipay’s parent group, Ant Group, which began life as a payments service on Alibaba, has established China as the world leader in digital transactions. Last year, it handled over $16tn in digital payments, which is nearly 25 times more than PayPal. Ant Group has just received approval for what is set to be the world’s largest IPO ever. In recent years, Ant Group has been trying to expand its international footprint with mixed success, which in part has been due to a degree of scepticism from US regulators. There have also been recent reports that the Trump administration is considering placing the group on a trade blacklist, which would have huge implications for its global partnerships with companies such as Mastercard and Visa.

If relations between China and the US deteriorate further, each could deploy a number of strategies. In a move of significant escalation, the US could impose sanctions against Chinese banks, preventing Chinese payment firms from accessing CHIPS (a New York-based clearing house through which the majority of all dollar transactions are routed), limiting Chinese access to SWIFT (around half of all high-value cross-border payments worldwide used the SWIFT network as of end of 2018), or finally, by cutting off Chinese banks’ access to the US dollar. All would have major implications for the global payments system and financial markets.

While a Biden administration is unlikely to change the country’s strategy towards China, it could ease tension and slow the pace of this war. But this is a long game that China is prepared to play. China has already achieved near universal use of digital payments domestically through Alipay, China Union Pay and WeChat, and is on the cusp of issuing a state-controlled digital Yuan currency. And while the US may have been successful in convincing some of its allies to curtail Huawei’s influence for now, the company is simply too big and too dominant in China to fail – and it is unlikely that the Chinese state would ever let it collapse.

E-commerce merchants who take payments online and operate globally will have to navigate this splintering and adopt both sides. You cannot be an online player in China without Alipay, CUP and WeChat, equally you cannot operate in the west without Visa and MasterCard, What is clear is that the Trump administration has engaged in a lot of posturing and sabre rattling on China, but to cut them off completely would be a decision for short term political benefit that causes long term damage. What could the Chinese do to hurt the American interests, particularly in China? Both powers have a significant dependence on the interconnected global technology and payments system. What is clear is these two global superpowers are going to have to find a way to coexist. They are more dependent on each other than they would choose to admit.

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APEXX Global Peter Keenan

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