The splin­ter­net ar­rives as dig­i­tal iron cur­tain is drawn

US at­tacks on Chi­nese tech giants are just one of many steps be­ing taken that will di­vide East and West again

The Daily Telegraph - Business - - Business Comment - garry white Garry White is chief in­vest­ment com­men­ta­tor at wealth man­age­ment com­pany Charles Stan­ley

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 are one 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 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.

‘I was en­vi­sion­ing a global Ten­cent, a global Alibaba. Now, I can only think of South­east Asian ver­sions’

Pro-China sup­port­ers protest against Amer­i­can sanc­tions out­side the US Consulate in Hong Kong

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