Smartphones enter the trade war

The trade war between the US and China is rapidly mounting, so that further developments were and are to be expected: still, the decision by Google not to provide assistance and updates to the newly released Huawei smartphones appears to be really disruptive. Moreover, at the end of a 90-day moratorium granted by the US Department of Commerce, Google will cut entirely its transactions with Huawey regarding existing devices.

Why did this happen? The tech giant Google is abiding to Trump’s Executive Order about the relations of US companies with Chinese companies that represent a risk to national security. In the case of Huawei we are not talking about a medium-size company but rather the second global smartphone manufacturer behind Samsung. Over the years Huawei has contributed to the expansion and improvement of Android, the open source operating system developed by Google, within which proprietary applications such as Google Maps and Google Play are nested. Now Huawei must decide whether to set up an alternative operating system or to keep Android in its open source version, giving up the proprietary components of Google.

The geopolitical disputes between the United States and China are intrinsically linked to trade issues, such as the current closure of the Chinese market to Google, Facebook and Twitter: in this respect, Trump’s choice can be legitimately considered as a retaliatory move against previous hostile choices by Beijing. In fact, trade wars in the form of duties and import restrictions often have a bad tendency to escalate: in the days following Google’s choice, President Xi Jinping ostensibly made a visit -together with vicepresident Liu He, head of the negotiating team with the US- to the city of Ganzhou, where an important center of transformation of “rare earth metals” (REMs) is located, i.e. those 17 chemical elements that are essential for producing ultracompact batteries, hard disks, electric engines and semiconductors, and on which China holds a largely dominant position (70 percent of the total global supply).

What would happen if China imposed an embargo on the sale of REMs to US companies? Certainly it would be a further and serious step on the path of trade war, with possible heavy repercussions on global GDP through the restriction of trade.

The technological side

But it is not just a geopolitical issue. In evaluating the Google-Huawei dispute we must pay attention to technological aspects, i.e., to the competition between new and old products, new and old production techniques. If it is true that the third phase of the Internet revolution (after its birth and the advent of social networks: user-created content) will consist of (i) the so-called “Internet of things” (IoT), i.e. the real time connection between objects thanks to the network, and (ii) of the “almost immediate” transfer of heavy data such as videos, then Huawei’s prospects appear much rosier, at least in the medium-long term. The reason lies in its comparative advantage over the technology that is most suitable for the Internet 3.0, namely 5G technology (the fifth standard in mobile communication): Huawei takes advantage of having invested not only on the devices, but also on the same 5G network, while competitors, maybe with the sole but lesser exception of Samsung, are essentially focused on the devices.

New technologies are often complementary to other technologies, and it is not entirely clear how well the Android operating system can be adapted to manage the necessary and extensive interconnections between devices and things that we will witness in the near future. The choice of Huawei to equip itself with a new operating system due to the impossibility of using Android, which now appears to be a forced choice due to the trade war with the US, could ultimately turn out to be the right anticipated choice to introduce and develop the right operating system for Internet 3.0.

Serendipity -to use the beautiful word coined by English writer and collector Horace Walpole- could apply here as well, within the grim and vengeful world of trade duties and restrictions.

P.S.: this is the English version of a piece I wrote for lavoce.info, the Italian precedent to voxeu.org.