Comment

Trump’s Chinese tech assault will help fracture the internet

By targeting TikTok and WeChat, the US has made a new digital iron curtain between East and West much more likely

Graphic showing world map with chess pieces as UK, US, China and Hong Kong flags

Washington’s China hawks have had a good week. Following recent US action against Chinese tech giants, one of the major investors in Tencent and Alibaba dumped half his shares in the two companies. Long-term supporter Zhu Haifeng noted Washington’s actions may have put a stop to their global ambitions – and he has cut his outlook for the two businesses drastically.

But it also means that Donald Trump has made a new digital iron curtain between East and West much more likely. His actions mean are more step in the creation of a "Splinternet" – a digital iron curtain separating East and West.

“I was envisioning a global Tencent, a global Alibaba. Now, I can only think of Southeast Asian versions,” Zhu said as he commented on his share sale. "The room for imagination evaporates. Valuation should be cut by one third.”

Two recent executive orders from Donald Trump have resulted in investors reassessing their outlook for Chinese technology giants. One order related to TikTok, and effectively put a deadline for Microsoft’s ongoing talks to buy its US assets. The other said the US would ban “any transaction that is related to WeChat by any person”.

It is yet another example of the Trump White House using national security laws to attack cutting-edge and successful Chinese technology companies as it attempts to prevent them gaining an edge over US businesses. It accuses them of using “stolen technology”. But the move is likely to hasten the break-up of the internet along regional lines, despite the US insisting it still wants a global web.

The Balkanisation of the internet has been slowly happening for some time – but moves over the past year are hastening the demise of a truly world-wide-web.

There has been a successful campaign to stop US allies using Huawei in their 5G networks – even though its technology is far superior to that produced by any American company.

Britain, Australia and Canada have agreed to restrict the technology in their next-generation networks – and it is likely US pressure and the threat of American sanctions will add more countries to this list. There have also been bans on US government pension funds investing in Chinese equities to starve them of investment.

The latest moves through executive orders from President Trump are part of the White House's Clean Network programme that was expanded in August by Secretary of State Mike Pompeo.

It is the Trump Administration’s "comprehensive approach to guarding our citizens’ privacy and our companies’ most sensitive information from aggressive intrusions by malign actors, such as the Chinese Communist Party”, Pompeo said.

It aims to ensure “untrusted People’s Republic of China carriers” are not connected with US telecoms networks as well as removing untrusted applications from US mobile app stores.

It is also targeting smartphone manufacturers and aims to prevent US citizens’ data from being stored and processed on cloud-based systems accessible to “our foreign adversaries through companies such as Alibaba, Baidu, and Tencent”. All US cables also need to be “clean”.

However, actions by the US to protect its national security have also got its allies nervous. The US Clarifying Lawful Overseas Use of Data (Cloud) Act extends criminal warrants served on a US-based provider to all emails regardless of where in the world the servers are located.

Essentially it means – in theory – the US can access emails and data on servers in foreign territories if they are on servers owned by US businesses. This has resulted in Australia leading the way in moves to enforce its own data sovereignty and mandate important data is held on servers with Australian jurisdiction.

Data sovereignty is likely to become more of an issue as the value of data increases in the 5G age. Countries are likely to introduce their own laws to protect data of their governments and citizens as they fight a three-pronged attack against increasing US security laws, cybercriminals and malign state actors.

Of course, the internet has never been truly global. Starting in rich western nations, many did not have access to it through lack of infrastructure. But as the reach increased, many authoritarian countries including China, Russia and Iran have censored the content for political or religious reasons.

Nevertheless, the inclusion of Hong Kong inside the so-called Great Firewall of China when Beijing introduced its National Security Law last month is another major step towards a divided internet.

It means that major US tech groups could find themselves having to decide whether continuing to do business in Hong Kong, within the ever-extending reach of China’s security and espionage services, is possible over the medium term.

For investors, this trend will have significant implications if, as seems likely, it continues. It will mean companies will need to rein in their global ambitions, as complying with different regulations in different jurisdictions will be a costly – if impossible – challenge. They may not even be able to operate in certain countries anyway, with tit-for-tat action following the US campaign against Huawei likely. 

The Splinternet is not a single event that will happen at a specific point in the future. It is a "death by a thousand cuts" that is evolving over time, as distrust and rivalry between Beijing and Washington increase.

Washington is now on record as wanting to cleanse Chinese influence from US communications and its infrastructure. Every action it takes to meet this goal will be one more step towards a more restricted global internet. The Splinternet is already here.

Garry White is chief investment commentator at wealth management company Charles Stanley