John Sitilides: China probably has its single most effective lobbying operation in Brussels, than anywhere else in the world.
Simone Gao: The United States itself does not have 5g technology. Do you think that’s going to be a big problem for the US?
John Sitilides: From a planning perspective, it puts us at a very dangerous situation going forward.
Narration: The big U.S. tech giants seldom talk about the danger of the CCP’s technological ambitions. Do they have their own agenda?
John Sitilides: When we hear tech executives talk in ways that are completely divorced from political and social reality, it’s very troubling.
Simone Gao: So do you think their motivation is ideological or it’s profit driven? Or is it a combination of both?
John Sitilides: I think it’s mostly profit-driven.
Narration: My discussion with John Sitilides, geopolitical strategist at Trilogy Advisors, takes place at the height of a 5G deployment war between China and the United States.
Host: I am Simone Gao, and you are watching Zooming In.
Title: As Europe passes tipping point, will Huawei dominate 5G globally: John Sitilides
Part 1: Huawei’s 5G Global Deployment Status
Narration: Huawei, the world’s largest telecom company, has now more than 60 commercial 5G contracts outside China, and is poised to get many more.
Narration: Despite the ongoing U.S. effort to lobby its allies not to do business with Huawei, many countries have since deepened their relationship with the Chinese telecom giant. Last month, Germany announced that it won’t exclude any supplier from participating in Huawei’s 5G rollout. Thailand and the Philippines have shrugged off the cybersecurity warnings and decided to go with Huawei. Many more countries including the United Kingdom have not yet made a final decision.
Simone Gao: The US has problems persuading its allies in Europe and Southeast Asia. And Huawei just rolled out it’s 5G in Southeast Asia. So what do you think is the path forward?
John Sitilides: Well, I think we have to look at this situation either regionally or in a market by market basis. Some of the ASEAN countries very clearly, there’s great concern about the rise of China and ways that can be aggressive if not outright hostile. And we’ll talk about that when we talk about the South China sea, but they’re also very realistic. I mean Huawei is able to provide superior products and services in 5g hardware and software at very competitive pricing. So that’s playing a very major role here. And the degree to which these countries that are neighbors of China have to balance out their legitimate security concerns and their relationship with the United States versus the fact that the Chinese economic colossus is in their neighborhood, puts them in a very delicate situation. So I think a lot of that geographic and frankly geopolitical reality is weighing on political decision makers in many ASEAN countries.
John Sitilides: Although obviously in countries such as Japan and even in Taiwan now we see that they are not going to be coming into the Huawei network. I think in Europe you have a different situation where you have very strong political and economic relationships between the U S and a number of European countries. But China probably has its single most effective lobbying operation in Brussels, than anywhere else in the world. They have deployed thousands of business people and everyday citizens who are operating in Brussels to be able to lobby European union bureaucracies, bureaucrats, nationals from different EU countries in an effort to expand Huawei into European markets and also the Belt Road initiative. And so I think that European countries, especially their business leaders are making purely business and economic and financial decisions as opposed to the kinds of national security considerations that we would like those governments to begin to take going forward.
Simone Gao: OK, so their narrative is, I mean for those lobbyists in Europe, their narrative is: Huawei is not a big national security threat and they are cheap?
John Sitilides: Well one, it’s obviously the economic competition. I mean, the bottom line is, thanks to both Huawei”s technological prowess and also frankly it’s intellectual property theft over the years, over the decades: Cisco, Motorola, and a number of other companies, they are able to provide superior hardware and software services. And whether it’s because of state run banks that are providing the kind of financial support for Huawei or other means, they’re able to undercut the pricing of competitors such as Nokia and Ericsson. So you have ironically, two major European companies that are unable to enter into European markets as effectively as Huawei is. And then there are the political considerations and again, the Chinese have put together a spectacularly effective lobbying operation in Brussels, not only on issues such as Huawei but also on Belt Road, port engagement and a number of other issues that are very beneficial for Chinese financial and economic penetration of the European union.
Simone Gao: So the prospect doesn’t look very good for you.
John Sitilides: Well, it’s going to be very difficult because we may see the United Kingdom, and they are going to hold off their decision on Huawei 5g until after the upcoming elections. And I think we’ve been able to move the needle in sort of the proper direction in London, but it looks as if most European countries, I think there are several dozens now, that have already signed commercial contracts with Huawei. And so they are abandoning Nokia’s and Ericsson’s very, very high tech superior quality and pricing, for Huawei. And I can’t help but think that there’s also a political dimension to those decisions in other European countries.
Simone Gao: Poland is not going to go with Huawei. Is that the only country in Europe that does that?
John Sitilides: No, there are several dozen countries in Europe that are now inside of the Huawei 5g commercial contract network. So Europe is already passed a tipping point.
Simone Gao: No I’m saying Poland is not going to go a 5G with Huawei.
John Sitilides: But Poland is also a country that is a standout in terms of, not only it’s relationship with the United States, but it recognizes…it has a very vulnerable security situation given its relationship with Russia and also it’s desire to have a stronger US partnership, US deployments in Poland and to help protect that North Eastern part of the NATO flank. So I think the US Poland relationship may be somewhat different than that of a number of other Eastern European countries that have come into what’s now the 17 plus 1 belt road initiative where even EU countries are signing up for the BRI loans and projects.
Simone Gao: Is Poland the only country in Europe that is not going to go with Huawei on 5g?
John Sitilides: We’ll look to see what happens with the United Kingdom, and I think there was still a handful of countries that have not made a final decision. I think we’re looking to work those countries as energetically as we possibly can with a persuasive argument. Ultimately they’ll make the decisions that they feel are in their own national interests and they feel that they can block off those areas of 5g hardware and software that might provide sort of back doors for the Chinese communist party or the Chinese military to be able to conduct espionage activities. But the U S government feels that it’s going to be very difficult to do so. And I think a lot of this is simply a matter of putting facts on the table and hopefully persuading the remaining European governments that it’s in their best interest to adopt a different 5g platform.
Bumper: Coming up, Huawei’s 5G empire is expanding overseas, what should the United States do about it?
Narration: In the race to 5G, the world has few alternatives. The Beijing-backed company is one of only three major companies in the world that can supply a broad range of advanced network equipment at scale. The other two are Ericsson and Nokia. But Huawei still dominates the 5G market, with state subsidies allowing it to undercut the pricing of other companies.
Narration: Moreover, the lack of a serious U.S. competitor in the 5G space makes it difficult for networks to turn away from Huawei.
Simone Gao: The United States itself does not have 5G technology. Do you think that’s going to be a big problem for the US?
John Sitilides: It is. And we had companies that could move us in that direction that have been completely undercut by Huawei and also by their own faulty decision-making over the last 10, 15 years. So we don’t really have any serious U S competitor for this space. And from a planning perspective, it puts us in a very dangerous situation going forward. But we have to look to see how we can support companies such as Nokia and Ericsson to provide for greater (protection against) intellectual property theft so that our own companies are able to see how they might enter the 5g space and look to see how they compete with a company such as Huawei, which really has been able to achieve an astonishing level of 5g prowess in the last several years. So we are at a disadvantage there. However recognizing the challenge is the first step and we can begin to take steps going forward to address it and to incentivize through research and development, through IP protections and the like, to incentivize companies to begin to move into this space. But today it’s a challenge for the U S.
Simone Gao: So you are talking about the US helping Ericsson and Nokia to to develop and deploy 5g instead of the U S developing its own 5G technology because probably it’s too late. Right?
John Sitilides: Well in the United States, of course we have a free market system. So the government is not going to create a company to enter the 5G space. They have to be incentivized to do so. One of the questions that we’re going to have here in the months and years ahead is: What are the U S major tech leaders doing about not only 5g specifically as it pertains to Huawei, but where are they looking to compete with what is now Beijing’s policy called “Made in China 2025” right? So president Xi Jinping announced that, in 2015 I believe, that China was going to be undertaking a command economy approach investing tens if not hundreds of billions of dollars to become a world class leader in robotics and information technology, in automation, in driverless cars and biopharmaceuticals and agriculture and aerospace and a whole host of breakthrough technologies that really will help the country move forward into the 21st century. Well, we don’t have that kind of a system in the United States. Here We have a free market system, but companies are supposed to see these opportunities and move forward as best as they can competitively within the U S and around the world. But can the U S government, can the federal government enact policies that will incentivize these companies to embrace 5g and other technologies more energetically, more dynamically and more competitively so that we’re not at a major technological disadvantage vis-a-vis China come 2030.
Simone Gao: So do you think the U.S. government should incentivize those big tech companies or even give them subsidies to develop those technologies?
John Sitilides: That’s a very difficult question that has to be sorted out politically by the voters here in the United States and also the major parties that seems so polarized on other issues. Subsidies is a very difficult area because one might argue that it’s not really the role of government to subsidize, but you use tax policies, you use regulatory policies to provide as free and open a space for technology companies to embrace these technologies and race forward. But I think a large part of the burden is also on these US companies. They’re US (companies) and they were created here. Most of the chief executive officers and top C suite executives live in the United States and they enjoy the benefits of living in the United States. But you often hear them speak in ways that make them quote unquote “citizens of the world”, whatever nonsensical concept that is, and look to favor multinational policies that are in the company’s bottom line best interests, but aren’t in the U S’s best interests.
John Sitilides: And I think we’re going to have to have a very serious dialogue in the United States about the degree to which companies that enjoy the benefits of operating and profiting in the United States have some sense of duty or civic responsibility to help make sure that the United States remains a free and open space for competitive economic and financial activities against a command economy controlled by the communist party that is looking to overtake the United States by 2049 as their leaders have publicly stated. So I think that’s going to be a very interesting public dialogue between government officials, political leaders and executives and business leaders in the U S technology sector.
Simone Gao: You raised a very important interesting point. Those big tech companies in the U S, I’ve never heard them talking about Made in China 2025 and stuff like that. It seems like they’re just not interested in that kind of stuff. And another thing is I think a couple of weeks ago, I did an interview with this gentlemen and we discussed Google, Sergei Brin. He had a talk in Google and he basically said it will be in the best interest of the people in the world to have those advanced technologies developed by international organizations like Google instead of the US national security contractor or something like that in the hands of the military. So it’s like they have their own agenda. They have their own goals in the world.
John Sitilides: Let me say this, in an ideal global environment, all countries would operate within a free and open international economy. And in this case when we talk about China, I think most Americans would welcome a China that operates democratically and liberally in a free and open manner as part of an international economic system in which everyone has an opportunity to compete and to participate. That’s an ideal world. That’s not the world that we live in. And I believe that our international landscape is only going to become more complex and more dangerous in the years to come because we forget that the Chinese communist party controls everything in China. And it is looking to potentially usurp the United States as the leader of the free and open international economy, but also potentially to create a different type of global economy that suits the Chinese communist party’s interests, not that of the international economy and its participants.
John Sitilides: So when we have American executives or executives in any country talk about this utopian world, it’s a fantasy until you have a situation where there’s a different level of governance in Beijing. But as long as you have a Leninist type Chinese communist party in power in Beijing, that openly proclaims its ambitions to dominate Asia’s commerce, to push the United States out of the Pacific region, to one day overtake the United States as a global leader, then this is all a farce. And I think it betrays a lack of responsibility and frankly, a lack of gratitude to the United States for providing the kind of environment, economically, politically, and socially for companies like Google and every other technology company that thrives in California and elsewhere in the United States. This didn’t just happen. It takes political decisions. It takes a sense of civic obligation. It takes a sense that we’ve created a magnificent system here, but it’s fragile and it has to be protected and preserved and upheld.
John Sitilides: And when we hear tech executives talk in ways that are completely divorced from political and social reality, it’s very troubling. So I think we need to be cognizant of what we’re dealing with here. It’s not ideal. It’s the real world. We have to make decisions based on facts. And sometimes we hear some of these pronouncements from executives that are completely surreal and divorced from reality.
Simone Gao: So do you think their motivation is ideological or it’s profit driven? Or is it a combination of both.
John Sitilides: Well, I think it’s mostly profit-driven. And the problem is that they don’t recognize that there is increasingly an ideological divide between what I would call the free and open international economic system that we’ve enjoyed for many decades, especially since the end of the cold war with the Soviet union, and what is now an increasingly aggressive and muscular Chinese communist party controlling Beijing, controlling the Chinese economy to the degree that they want to make sure that the primacy of the party is always first and everything else comes under that.
John Sitilides: So yes, in Beijing you have officials who want to make sure that as many Chinese citizens are able to enjoy economic prosperity and that you have stability in Chinese society, but those are not the end goals for their own sake. The end goals are to make sure that you have the primacy of the Chinese communist party, first and foremost. Most American business leaders don’t recognize this either because they don’t know or they don’t want to know. They want access to that vast Chinese market. And from a business leadership perspective, you can’t blame them. But we’ve eliminated any talk of values as China has risen over the last 20 years since we permitted it to join the World Trade Organization. Notice how the phrase “human rights” has disappeared from more and more international fora. Because if we talk about human rights, we have to face the reality of what’s happening in China and that makes the kind of open ended access that we’d like to achieve in China more difficult to achieve. So I think we have to recognize that we are in an increasingly ideological divide. And much of this is because president Xi Jinping has made very clear, there is an inherent tension between socialism with Chinese characteristics and the Western free market system. And I think that’s going to become increasingly apparent in the years to come.
Simone Gao: This is extremely important. I think this is also relevant to the U S China trade talks. I’ve been asking different people about this question all the time. So the U S government demands of China to do structural changes to their economy, to the U S-China trade relations. Like get rid of the forced transfer of technology, protect intellectual property rights and get rid of the subsidies and stuff. But essentially what they’re asking is to have the Chinese communist party to change the way they run the economy, to change the way they run their country, basically change the way they rule. So I think that’s almost a “mission impossible”. And I don’t know if the Trump administration really realized this and if they do, they have to have a different strategy regarding the U S-China trade talks. Maybe if they can’t do these structural changes anyway, what’s left for the U S-China trade talks and trade relations? Decouple right?
John Sitilides: Well, first of all we’re looking at how we make sure that we protect American economic interests. We protect American workers and we protect US businesses in what we feel has been a very unfair imbalanced relationship again, since China was permitted to join the World Trade Organization in 2001 and I have to give president Trump great credit. I mean there are many debates to be had about his leadership style, but there is one area in an increasingly polarized Washington where there’s a consensus among Republicans and Democrats that it was time to call out China on these very, very unfair, imbalanced trade arrangements of the last 18-19 years. So what we have now is a situation where much of what China has been doing has come to public light and has been exposed and we are now compelled to deal with these issues. But you raised some very important points here Simone. There are the structural issues that really do relate to the relationship between the state and the citizen in China and then there are those areas that are more immediately ameliorated we’ll say, such as buying more American foodstuffs, looking to see what can be done about currency manipulation, about greater intellectual property protections and the like. I think the Trump administration would have preferred a vaster, more comprehensive structural reform agreement. All indications are that’s where we were headed through the beginning of this year. And you may actually have a divide inside of Beijing, you know, we tend to think of the Chinese communist party as monolithic. I’m not sure that’s necessarily the case. You may have them monolithic in terms of absolute Leninist type control over all aspects of Chinese society. Right? And they’re frank about this. Government, military, schools, economy. That’s what the Chinese communist party is there to do, to maintain control over all of these for the wellbeing of the Chinese people.
John Sitilides: But from an economic perspective, there are those who believe that a more open Chinese economy, one that genuinely advanced the original vision of say, Deng Xiaoping, for reform and for opening up, would be better for the Chinese people, for Chinese society and ultimately of course as good communists for the wellbeing of the Chinese communist party. So they were looking to advance that more liberalized relationship and provide for a stronger foundation for future Chinese economic growth. And then you have, I mean for lack of a better word, the hard liners who feel that, too much reform, too much opening up starts to crack that edifice and will eventually weaken the ability of the Chinese communist party to maintain primacy inside of China. They seem to have come back with a vengeance in April or May of this year and to have held off any further progress.
John Sitilides: That’s why we’ve had these stymied talks through the summer and I think the Trump administration realizes that right now they have the upper hand and so they’re going to proceed from all of these public domain sources with a phased or a multi-phase trade arrangement that begins with a phase one agreement, sometime hopefully in the next few weeks, to at least get some of those immediately accessible issues addressed. But obviously as you note, not really addressing structural reforms because Beijing has decided they’re not going to proceed with structural reforms. No one is able to force Beijing to make structural reforms from the outside. The Chinese communist party is extraordinarily powerful and the Chinese economy is an extraordinarily vast and powerful economy. So no one can force China to do anything, but can we begin to move China in that direction and can forces inside of China, which are weakening the Chinese economy over time, right? You have demographics, you have labor issues, you have environmental degradation, you have debt bubbles that may burst and we have a number of things that are very troubling from a purely economic perspective inside of China. Those issues may be the ones that force the communist party officials to rethink the reform structure. But it can’t be done right now from the Trump administration. And there’s also the fact that you have a large number of hardcore Chinese nationalists inside the country who would rebel to the degree that anybody can rebel in China, against the decision to capitulate to what they would see as US intimidation against China. So there are these political realities inside of Beijing as well. So we’re going to have to wait for the structural reforms and then the question becomes, does it matter? Can we proceed with some of the more important trade imbalances for now and start to move the country in the right direction? Or do you forego the entire process because you can’t get the structural reforms? And this administration has made a decision. We’ll take what we can get and then we’ll try to see when we can start the talks on other parts of this trade arrangement in the months to come. Or if there’s a second Trump administration, then Xi Jinping probably has no choice but to engage in a second phase trade negotiation if there’s a second Trump administration.
Bumper: Coming up, even in a second Trump term, will a structural change from China’s side be possible?
Simone Gao: Very, very interesting. Even under Deng Xiaoping,, China has never really transformed into a market economy. It’s because the market economy needs a political system to back it up and China fundamentally cannot make that transformation in my opinion. So I think I agree with you. The Trump administration is trying to get what they can for now, but if the structural changes are something that the Chinese communist party just can’t do, I mean they… Look at what they are doing now. They are reversing the privatization of companies. Now the party is going to all of the private companies and taking the good part out of them and is making them state owned and stuff like that. So they’re not going to further open up. They are reversing the process. So I heavily doubt the Chinese communist party will do the structural changes. If that’s true. The Trump administration should really think about what’s next if those things can’t be done. Do you think the U S and China economy should decouple?
John Sitilides: All right. A couple of things here. I think the Trump administration recognizes that it needs to get the best that it can in terms of changing the direction of U.S.-China trade arrangements that have been so damaging to the U S economy for the last 20 years. Again, it’s not an ideal series of victories, but it’s a partial set of victories and I think they’ll look to take them where they can. On the structural reforms, those may take place inside of China, not because of anything that’s agreed to with the U.S. administration, whether it’s President Trump or President Elizabeth Warren or whoever might a follow on in 2021 to 2025, but because there are inherent contradictions now, there are major tensions inside the Chinese economy that Chinese political leaders have no choice but to begin to address, so that’s going to be an internal issue. There’s also no guarantee that Xi Jinping would remain president of China or more realistically general secretary of the Chinese Communist Party.
John Sitilides: He’s been given unprecedented power, right? The greatest power since Mao Zedong in 40 years in China, to steer the country forward in a certain direction. Right? So now we even have Xi Jinping thought embedded in the Chinese constitution. So almost a cult-like status for the general secretary. But if he fails to protect China’s economy, or he’s seen by other Chinese communist party leaders as not sustaining the primacy of the Chinese communist party effectively, there’s no guarantee he’s going to survive. And so again, there’s not a monolithic political direction inside the party. So if there’s a consensus that he’s succeeding, he’ll have more support, a longer term, three, four, five terms, however long he’s able to live and thrive. If he fails, there’s no guarantee he’ll be general secretary in one year or three years or five years. So there’s a very uncertain political future in China.
John Sitilides: And a lot of this is based on the fact that there are these serious problems inside of China that most of us outside of China don’t understand very well. Most Americans don’t understand China very well. Certainly our political leaders don’t understand China very well, so they’ve (China has) been able to mask much of this. But if you talk to the Chinese people and people who know China very well, they’ll be able to point to a number of very serious problems in the next one, three, five, 10 years that are affecting China. So there’s no idea that there’s going to be this permanent rise of China at everyone else’s expense. We were like this with Japan in the 1980s and Japan now has been in economic doldrums for the last 30 years. So we have no idea what awaits us in China. What we can do is control what the United States does and persuade our allies to address these challenges and move forward in ways that give us as much of a competitive advantage going forward as possible. While seeing what is playing out in Beijing in ways that, again, we’re not able to control.
Simone Gao: Yeah, that’s right. The Chinese leadership, those more open minded communist party leaders, they are seeking the structural changes to their economy. Those structural changes are different from what Trump is seeking. The structural changes they are seeking are like…there are structural imbalances in the Chinese economy. For example, they over invest, they over invest in infrastructure and stuff like that. That’s what has been driving the Chinese GDP for decades. So they have that problem. But the Trump administration is…the structural changes the Trump administration is talking about is about forced transfer of technology and things like that. So I agree with you. I mean those structural changes to their economy that the Chinese leadership, the open minded Chinese leadership is looking for…I don’t know if they will address the U.S. – China trade relations directly.
John Sitilides: Well, keep in mind that the Trump administration’s goal here is to open up the Chinese economy and the Chinese market so that American companies and potentially economies from other parts of the world can fairly compete with China. In other words to remove all of the unfair advantages that China has, as a quote unquote “developing country” inside the WTO when it’s the second largest economy in the world. I mean, at what point are you no longer a developing country with all of the advantages that the WTO confers. Sort of an absurd situation. And yet they’ve been able to sustain this inside the WTO. But, but the goal here is to provide as much of a competitive openness or opportunity for the United States and our companies to be able to prosper and thrive in China as we’ve given to the Chinese companies to thrive and prosper in the United States so that we have reciprocity.
John Sitilides: I mean, that’s really the goal here and the thinking is that if US companies are able to compete in a free fair and open marketplace, we can outdo the Chinese and any other country’s companies, like we have done in so many other sectors. The goal is not to promote structural reforms that the Chinese communist party feels threaten their rule over China. That’s not the Trump administration’s goals. I mean that’s a regime change strategy that no country is looking right now to promote in China. We’re dealing with China’s governing leadership as it is, not as we would wish it to be. So given the reality that the communist party will likely remain in power for the foreseeable future, not necessarily forever, but for the foreseeable future, you get what you can out of that reality. And that’s what the Trump administration is looking to do with again, an imperfect trade agreement, a partial trade agreement. But one that puts us in a much stronger position today and next year than we were in in 2015 and 2016
Simone Gao: So you agree with President Trump on the partial trade deal with China. You think that’s a good thing.
John Sitilides: I wish we could have attained greater economic rearrangements, but if this is the best that we can do right now, and the Chinese, they have a say in this, they’re not going to give Washington everything Washington wants. So this is phase one and I would say take the maximum that you can now, pocket it. Trump has to try to win reelection. And then if he does, he’s able to come back to Beijing and say, “now you have four more years with me, let’s go back to the table or I’m going to come after your economy again with tariffs, with pressures and whatnot”. I think to a certain degree, the Chinese leadership has gambled that Trump is not going to survive the 2020 elections and they’ll be dealing with a US president that’s easier to negotiate with if they have to negotiate at all.
Simone Gao: So you think the bottom line is that president Trump is not seeking a regime change in China. Not only is he not seeking it, not only is not talking about it, he’s really not seeking a regime change in China.
John Sitilides: I think that’s correct. Yes. He’s not seeking regime change in China.