The high, high cost of sanctioning Huawei

TOKYO – Bans on Huawei telecommunications equipment may cost the US and its allies more than US$100 billion according to industry estimates, but those who want to exclude it from their 5G networks say no price is too high for national security.

Issues of industrial policy, oligopoly, price competition and the rise of protectionism have made the problem more complex amid an escalating tech war where the US seeks to block China’s access to advanced technology including high-end semiconductors.

Calculations by telecom network operators, industry consultants, economists and governments indicate that replacing Huawei equipment that has already been installed could eventually cost the US and its allies more than $10 billion; that the negative economic impact of a slower roll-out of 5G services could be two or three times greater; and that paying the higher prices charged by Huawei’s competitors could raise the total cost of implementing 5G to a level several times higher over the course of the decade.

The potential losses are staggering in financial amount and economic import:

• In 2019, when the US first blacklisted Huawei, global mobile telecom association GSMA estimated that banning Chinese telecom equipment would delay the rollout of 5G networks in Europe by about 18 months and increase its cost by about 55 billion euros.

• That same year, a report based on government data and input from mobile telecom operators concluded that banning Huawei from the UK’s supply chain could delay 5G by 18 to 24 months and cost the UK economy as much as 6.8 billion pounds.

• An Oxford Institute of Economics study covering Australia, Canada, France, Germany, Japan, India, the UK and the US concluded that excluding Huawei could increase 5G investment costs by 16-19% and result in a reduction in GDP of $105.5 billion in the 15 years to 2035 in a median cost scenario.

• In 2022, the US Federal Communications Commission told Congress that removing all Huawei and ZTE equipment in the US alone would cost about $5 billion. The Oxford Institute’s median estimate of the long-term impact on US GDP was estimated at $35.8 billion.

• In March 2023, a report in telecom industry magazine Light Reading indicated that it might cost Deutsche Telekom more than $6 billion to remove all Huawei equipment and that it could take as long as five years. Of 134,000 5G antennas in Germany, about 80,000 were reportedly supplied by Huawei.

These estimates do not include lost sales of semiconductors and other products restricted to Huawei, which amount to tens of billions of dollars more.

Huawei’s telecom equipment prices are reportedly often 20-30% lower than its competitors. They are not always lower, but they have been low enough to enable Huawei to take high market shares in Europe, the home of competitors Nokia and Ericsson.

Price, of course, is not the only factor relevant to telecom carriers: Huawei’s success is also based on good and sometimes superior quality.

According to Strand Consult, a telecom consultancy based in Denmark, the percentage of Chinese equipment (most of it from Huawei but some from ZTE) in European national 5G rollouts ranged from 100% in Cyprus to zero in Sweden, Norway, Denmark and eight other countries at the end of 2022.

Among other countries, it ranged from 72% in Norway to 17% in France, with Germany at 59%, Italy at 51% and the UK at 41%.

John Strand, founder of the eponymous consultancy, for one, finds this alarming. “It is more dangerous to be dependent on Chinese telecoms networks than to be dependent on Russian gas. Digital infrastructure is the fundament of society,” he said.

In February 2020, Robert O’Brien, then-president Trump’s national security advisor said, “We have evidence that Huawei has the capability secretly to access sensitive and personal

information in systems it maintains and sells around the world.”

This evidence has reportedly been provided to the UK, Germany and other US allies.

Before that, in May 2019, The Sydney Morning Herald reported that agents of the Australian Signals Directorate, the nation’s top-secret eavesdropping agency, had been given a challenge: With all the offensive cyber tools at their disposal, what harm could they inflict with access to equipment installed in 5G networks of a target nation?

The ASD found that “the offensive potential of 5G was so great that if Australia were on the receiving end of such attacks, the country could be seriously exposed.”

The key issue was not tapping phone calls or emails, but instead disabling water, power and other infrastructure. Six months later, the Australian government excluded Huawei from its 5G rollout.

Asked if he has seen any hard evidence of Huawei using its 5G equipment for purposes of espionage, Evan Anderson, CEO of information service INVNT/IP (Inventing Nations vs. Nation-Sponsored Theft of IP), told Asia Times by email:

“While I am not aware of a case wherein Huawei was caught directly surveilling foreign citizens outright, they retain the motivation, capability, and government support to do so. As with any company in China, they cannot say no to the government or Communist Party, by law.

“They are a de facto arm of the Chinese state. Conversations about backdoors and evidence of direct surveillance therefore miss the point: surveillance could be achieved in myriad ways by using third parties and leaving the front door open.”

There may not be any publicly-available hard evidence, yet, but national security concerns center on the preemption of potential threats, not about being innocent until proven guilty. Huawei’s rebuttal of the allegations against it can be seen here.

5G network vulnerability is a two-way street. The Sydney Morning Herald article said, “To be sure, China would also be vulnerable to attacks from the US and its allies.”

In 2014, as reported by The New York Times, documents provided by whistleblower Edward Snowden revealed that the US National Security Agency had already hacked Huawei servers to conduct espionage of its own.

The Five Eyes (US, UK, Canada, Australia and New Zealand) intelligence-sharing network are losing, or have already lost, their previous monopoly on telecom espionage – and clearly they don’t like it.

The economic argument for continuing to use Huawei equipment and the national security argument against it are irreconcilable. But telecom equipment is both critical infrastructure and key to the development of an advanced economy.

That, of course, is why Japan, South Korea and China have devoted decades of effort and heaps of capital to developing their own first-class telecoms technology.

All three countries have eliminated excessive dependence on foreign suppliers and created domestic intellectual property and supply chains that generate returns far outweighing the initial costs of development.

The US, Canada, Australia and Europe now intend to do the same. How long it might take and whether they can avoid the temptations of oligopoly and protectionist destruction of price incentives remains to be seen.

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