Technology has turned geopolitical. The US has blocked semiconductor exports to China. In turn, China has looked to limit US access to rare earth minerals, crucial to the manufacture of many tech products. Several countries have banned China’s Huawei from running their 5G telecommunications networks. India has also banned the Chinese-owned viral social media app TikTok, following border clashes between the two countries. The British government is, meanwhile, investigating Nvidia’s proposed acquisition of Arm, the chip designer, on national security grounds.
For some trade economists, schooled in the quaint idea that humans are rational actors, such developments have come as something of a shock. From a classical economic perspective, this kind of escalations make in our opinion little sense. The high priests of globalization, it seems, still preach that free trade is an economic blessing, encouraging higher growth, lower costs and productive specialization. However, such interventions do make sense when viewed from another perspective: Security.
The interconnections of the digital age have blurred the distinctions between economic and security issues. Dominant tech companies are both engines of economic growth and channels of security risks. They also enjoy outsized profits, global market penetration and the ability to set industry standards. Trade and industrial policies are therefore easily hijacked by broader security and geopolitical priorities. Therefore technology wars in our opinion are becoming more and more the new trade wars.
In the past, many countries have blocked imports to protect national champions and their often monopoly profits. What makes the latest technology disputes unusual, and unnerving, is that the dominant players are trying to block exports from third countries, too. The decoupling of the US and Chinese economies and the fragmentation of the internet, the so-called splinternet, in our opinion threatens to entangle the rest of the world. Other countries will have to find ways to preserve free trade in as many areas as possible and agree to common rules to protect cyber security.
Most ambitiously, we should think calling for a new set of Bretton Woods – style institutions, the digital successors to the IMF (International Monetary Fund) and the World Bank that shaped the global economy after the second world war. But that most probably is never going to fly in the absence of US leadership. More modestly, we could think about the creation of a global digital stability board, along the lines of the Financial Stability Board, that would monitor risks to cyber security.
Some strategists argue that we should accept a return to a neo – Westphalian world order in which the US and China will define and control their own spheres of influence, as happened between Europe’s great powers after the Peace of Westphalia of 1648 ended the Thirty Years War. But we believe that the modern age is over. It is no longer in our opinion “my place, my rules”. It’s goodbye Westphalia.
Traditional analogue sovereignty which controls territory, resources and people remains a necessary function of modern states, but that becomes now more and more insufficient. It must in our opinion also reach an accommodation with digital power, which controls data, software, standards and protocols and is mostly in the hands of global tech companies. We have to realize the danger of big technology companies as they can sway the lives of millions of people in lasting ways and have over the years assumed the powers of a “private government” and pose therefore a threat to democracy. We could argue that analogue governments do still have the power to shape digital sovereignty to their own ends and therefore suggest the EU should partner with like-minded democratic countries such as the UK, Japan, Canada among others. The EU already took the lead in 2018 by adopting the General Data Protection Regulation (GDPR), which has in effect defined global data usage standards. Last month the EU also laid out plans to pioneer legislation governing the use of artificial intelligence (AI).
It is clear to us that the US and China are increasingly being drawn into a titanic struggle for supremacy. The rest of the world must therefore rapidly figure out how to protect its own economic interests and assert its own values if it is not to be trampled in that fight.