Politics on platforms, Huawei, Cyber, Trade, Sanctions and Tim Cook doing it again.

Political Disruption, November 22

Good Morning!

Welcome to a new week of Political Disruption!

This week we talk about the dilemma societies face when policing the truth and political ads on platforms, the latest on Huawei, Cyber, some good and some bad news on sanctions and as can be expected some not-so-clear news on Trump’s trade wars.

If you think any of your colleagues or friends care about how politics is disrupting business and technology, please share this newsletter with them.

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Thanks!

Hans

Tech

Politics on platforms

The content debate is raging in big-tech land. Whether it’s about running political adverts (Twitter, Google), political adverts containing lies (Facebook), or the difficulties banning extremism (Facebook) there remains one big dilemma: On one side we want to avoid fake news, disinformation and radicalism spread through our social networks. But on the other hand, we don’t really want firms like Facebook or Google deciding what is too radical, what is right or wrong. But who else can? Do we want the government to do this? The Chinese government is really good at deciding what’s good or bad (for the Chinese Communist Party that is), but that’s not really the way to go is it? Would we like the American government to decide what’s right or wrong? Or the European Commission?

So we seem to be in a bind, there’s no really good solution at this moment. But the answer might lie at big tech’s feet: their algorithms. These are the culprits that make that extremist views get so reinforced, but they’re also the moneymaking machine behind those firms. So, it’s up to you Big Tech…

Huawei

While the US has granted a number of individual Huawei exemptions in an attempt to improve relations with China as the trade-truce is having some difficulties to come around (see trade section), German Chancellor Angela Merkel is facing a party revolt over Huawei’s role in German 5G rollout. Merkel’s argument is that a blanket Huawei ban is not necessary and that case-by-case security guarantees would be enough, almost the same argument that Bill Gates is using when he states that Paranoia on China is a ‘crazy approach’ to innovation.

The ones who are not doing so bad over the U.S. sanctions are the Huawei staff who will be awarded more than $280 million in bonuses for helping the company go through the U.S. sanctions.

Cyber

The UK Labour Party was Hit by a “Sophisticated” and “Large-Scale” Cyber-Attack that failed to breach any data according to a Labour spokesperson. After the cyber-attacks on campaigns in the US elections in 2008, 2012 and 2016 it should be clear that parties better have a good cyber defence team.

The increasing threat of cyber attacks, data breaches (and the European fines on them) are driving cyber insurance growth.

The biggest threat on the horizon for cyber-warfare is the development of quantum computing. The computer power of quantum-computers would be so big that it would make most current encryption systems obsolete. Therefore a new race is going on the build quantum-proof encryption.

Sanctions & Trade

Trade

  • U.S.-China. While the ‘phase one’ deal between the US and China has been announced for some weeks now, the parties are struggling to finalise the deal.

  • A new study shows that American manufacturers are paying a heavy price for the trade war

  • U.S.-EU. Normally we would have reported on whether the U.S. would impose tariffs on European (and other) cars and automobile parts and on the EU retaliation to it. A decision was due last week (after having been postponed in May for six months). But no positive or negative news came from the White House. There’s a debate going on between trade lawyers on whether the President has really missed the opportunity to take action (and the tariffs are off the table definitively) or he still can decide on the issue in one way or another.

  • Remember our previous issue when we described the political acumen of Apple CEO Tim Cook? He seems to have done it again as Trump considers sparing Apple from US tariffs on China.

Sanctions

On the sanctions front, there’s quite some good news.

  • Russian sanctions. There’s a thaw in relations between Russia and Ukraine. There are plans to hold a summit to revive Ukraine conflict talks and Russia returned three naval vessels it captured a year ago as a goodwill gesture to Ukrainian President Zelensky. A further rapprochement between Ukraine and Russia is an important precondition to allow the EU to loosen sanctions on Russia.

  • Qatar sanctions. Tensions are also softening between Qatar and Saudi Arabia as the Gulf states plan to participate in the football World Cup. This is seen as a sign that relations are improving and the complete embargo on Qatar might soften in the not so far future.

But it’s not all good news from the sanctions front:

  • Iran. The Islamic Republic has been gradually neglecting more requirements of the JCPOA, the Iran-nuclear deal, to put pressure on the US and Europe. But it seems that it has been going too far. Germany’s foreign minister said that the EU should reconsider imposing sanctions on Iran. While it wouldn’t matter very much as there’s (because of the extraterritorial reach of the US sanctions) almost no EU trade with Iran, it will certainly not be welcomed in a country where the economy has, according to the IMF, contracted by more than 9 per cent.

  • De-dollarisation. Meanwhile, Russia is trying to de-dollarize its economy and foreign holdings and shift towards the Euro and Renminbi to become less vulnerable to American financial sanctions.

That’s it for this week, all reactions are welcome and please share with your colleagues, friends, kids and/or mother-in-law.

Political Disruption, November 8

Regulating Big Tech, Race for 5G, Tim Cook's strategy, EU-China Trade, Trade war update

Good Morning!

Welcome to a new week of Political Disruption! Starting this week, we’ll broaden our scope to how politics and technology are interacting. How is technology changing politics, and how are politicians using and trying to curb technology?

If you think any of your colleagues or friends care about how politics is disrupting business and technology, please share this newsletter with them.

Share Political Disruption

Thanks!

Hans

Tech

Regulating big tech

U.S. Senator Elizabeth Warren speaking with attendees at the 2019 California Democratic Party State Convention at the George R. Moscone Convention Center in San Francisco, California. (By Gage Skidmore)

Both in the EU and the US, the debate on how to deal with Big Tech is raging. Among big tech companies, the idea is still that

the engineers are the best people to oversee their most powerful creations (FT)

With the exception of Microsoft whose President in his recent book argues that government regulation of technology firms is needed, tech firms still think that regulation would stifle innovation and that they really know what they are doing. Every time Facebook’s CEO, Mark Zuckerberg, appears before a Congressional committee or gives a speech this image of the sector as a careful guardian gets a dent.

Elisabeth Warren, one of the two leading contenders for the Democratic nomination has been very outspoken about her plans to unwind “illegal and anticompetitive tech mergers”. This would mean for example disentangling Facebook and WhatsApp.

Reuters gives a good overview of where U.S. presidential candidates stand on breaking up Big Tech.

Summarized:

Trump

Trump has stopped short of calling for tech giants to be broken up, as Democratic Senators Elizabeth Warren and Bernie Sanders have, but said “obviously there is something going on in terms of monopoly,” when asked about major tech companies in a June interview with CNBC. […] The president’s eldest son, Donald Trump Jr. wrote an opinion piece for The Hill political website in September entitled “Free speech suppression online builds case to break up Big Tech.”

Joe Biden

has taken a more moderate stance than his progressive rivals on the issue of big tech company break-ups. In a May interview with the Associated Press, he said that splitting up companies such as Facebook was “something we should take a really hard look at” but that it was “premature” to make a final judgment.

Bernie Sanders

Sanders, a U.S. senator from Vermont who frequently criticizes corporate influence, has also called for the break-up of big tech companies such as Facebook and Amazon. His administration would “absolutely” try to split apart the companies, Sanders said at a Washington Post event in July.

Race for 5G

The US is preparing for a further crackdown on Chinese technology firm and 5G leader Huawei:

And Nokia is ramping up to be able to provide a non-Chinese alternative to Huawei:

Despite US pressure Huawei is not doing so badly. Both the UK and Hungary don’t seem to mind to roll out the carpet for the Chinese telecom giant:

And the firm as a whole does not seem to do so badly either:

Strategy in turbulent times

President Donald J. Trump and CEO of Apple Tim Cook in the Oval Office at the White House. April 25, 2018. (Official White House Photo)

While political disruption seems something that just happens, how firms deal with it is an important part of the equation. In this and earlier editions of the newsletter, we’ve discussed how Facebook’s CEO is very bad at it and shows that he has no clue how to deal with growing public concern over privacy, disinformation, monopolies.

Other firms are much better at this. Microsoft is at the forefront of pushing for regulation in the hope of being able to help develop it so that it wouldn’t stifle innovation. Of course, Microsoft has been where Facebook is now in the 90s and at the start of the century when it was embroiled in competition battles with the European Commission. But the firm has clearly learned its lessons.

Another firm that is showing good judgement is Apple. Especially its current CEO Tim Cook has been able to balance its interests in the US and China, avoiding to antagonize either the American or Chinese governments as Reuters reports and is using his relations to avoid new tariffs on Chinese-made watches, iPhone parts, AirPods.

But Apple has been in a relatively easy position as a hardware producer. Where other tech firms are banned in China or have to balance their market access interests in China with China’s censorship demands, Apple has been able to avoid these pitfalls until recently when it removed an app used by Hong Kong protesters on which police movements were identified, creating a small backlash over the world.

These problems could further exacerbate as Apple is transforming itself into a services company with Apple tv, gaming subscriptions and news services, which can become much more controversial in authoritarian regimes like China.

More tech news

Cyber

Cloud

Fake news, censorship

Facial recognition

AI race:

Fracturing internet:

Sanctions & Trade

Trade

China and the EU

Trump has been reproached to have missed a golden opportunity to take on the Chinese together with the Europeans. But at this moment it seems that the Chinese also missed the opportunity to deepen their economic relationship with the European Union at a moment when Transatlantic relations are under strain. The EU and China have been negotiating a Comprehensive Agreement on Investment (CAI). When negotiations started in 2013 the EU still believed that the Chinese were in reform modus. But it quickly became clear that Xi Jinping would not give the market a more important role in the Economy and has even prioritised the role of state-owned enterprises. Now it seems the Europeans are getting fed up with the negotiations.

The EU Chamber in Beijing stated that

Brussels now faces a “Sputnik moment” in its relations with Beijing and should, if necessary, make its common market less open to Chinese investment in certain areas.  (FT)

European businesses are increasingly feeling frustrated with the unequal playing field that European firms face in China at the same time that Chinese firms are much more free to do business in the EU. And they will push the Commission to close some markets for China in absence of reciprocality.

Trade war update

President Donald J. Trump joins Xi Jinping at the start of their bilateral meeting Saturday, June 29, 2019, at the G20 Japan Summit in Osaka, Japan. (Official White House Photo by Shealah Craighead)

There’s appearing some preliminary good news on the trade war front:

But the US and Chinese presidents are still looking for a nice location to sign their deal after Chile cancelled the APEC trade meeting it would be hosting as protests raged through the country.

Another complication for global trade is that China was cleared to impose $3.6bn in new tariffs on the US in a dispute over how the US calculates its anti-dumping duties. While the $3.6bn would only be a drop in the ocean of tariffs between the US and China, it would certainly re-escalate the trade war if China applied them.

But overall, as we argued a few weeks ago, a small truce will not be the end of this trade war.

And even little wizards are not immune from the trade war: Harry Potter publisher caught in US trade dispute with China

Sanctions

Political Disruption, October 25

Geopolitical risk in sanctions, trade, tech, cyber, finance and culture.

Good Morning!

Welcome to a new week of Political Disruption! This week we give an overview of all geopolitical risk that happened the past two weeks and we zoom in on how the volatility of geopolitical risk is increasing.

Hans

Geopolitical risk

Sanctions

Donald Trump lifts sanctions on Turkey while at the same time members of the European Parliament are eyeing sanctions against Ankara over its incursion in Syria against the Kurds.

Ilhan Omar, a representative in the US Congress questions in a Washington Post opinion piece the extended use of sanctions by the Trump administration.

Trade

The EU risks creating further turmoil on the trade field by considering a carbon border tax.

U.S. firms fear a mass boycott by the Chinese. Meanwhile American toymaker Hasbro is already suffering from the US-China trade war

Tech

In a new report, the EU warned of the political risks from 5G suppliers and Huawei admits that US sanctions are hurting its business.

Cyber

Facebook removed more than 200 fake accounts linked to either Russia or Iran, showing both that influence peddling for the 2020 election is gearing up and that social media firms are taking much more action than previously.

In a demonstration of how difficult it can be to understand who is attacking you in cyberspace, the U.S. National Security Agency (NSA) and Britain’s GCHQ’s National Cyber Security Centre explained how Russian group hijacked Iranian spying operations

Big tech

Mark Zuckerberg, Facebook’s CEO, was in Congress to defend his Libra digital currency project but was not very successful at that and received a lot of questions on Facebook dealing with disinformation campaigns and wasn’t always able to give clear answers.

Even without plans for a global currency, Facebook will be more in the spotlight in the coming election year as top Democratic Presidential Candidate suggested breaking up Facebook.

Finance

As US financial sanctions reach ever farther and deeper, countries are looking for alternatives beyond the dollar. Russia and Turkey have signed an agreement to use the rouble and the lira in their cross-border transactions. Russia is looking further to find ways to settle its energy transactions in roubles or euros.

Culture

China has a history of trying to influence the content of Western movies by threatening to ban them. Given China’s huge market, this often works. But now China is on the other side of controversy as “Malaysia’s film censors have ordered a scene to be removed from the animated movie Abominable”. The movie shows China’s controversial nine-dash line in the South China Sea, claiming among other disputed territories a part of the South China Sea that Malaysia also claims.

Last Wednesday Malaysia also “banned a controversial belt and road comic for cultural insensitivity, promoting communism

Increased volatility

Recently we saw an increase in geopolitical risk. The main reason is that we are increasingly combining a very globalised world, where goods, money and data stream over borders with an increase in geopolitical competition. In a world where states are economically very dependent on each other, full-scale military conflict would be extremely expensive for both parties, but it allows states to manipulate the other’s states dependencies for political gain.

And that’s what we’re seeing. States use other states vulnerabilities in trade, data and financial networks to pressure them politically. We can see this in three important phenomena:

  • Sanctions: While sanctions were until recently mainly used by the EU, the US and the UN to deal with ‘rogue states’ (North Korea, Libya, Iran…), they became a more accepted tool of statecraft for other states like Saudi Arabia that sanctioned both Qatar and Canada for political reasons or Japan that put up an export ban of chemicals to South Korea after a dispute dating from the Second World War.

  • At the same time, we saw a take over of trade policy by broader foreign policy goals as in the case of President Trump’s tariffs on aluminium and steel (and soon cars?) that were framed as national security concerns. And this geopolitisation of trade policy is very present in the trade/tech/geopolitical competition between the US and China. (here’s an analysis of the US-China trade conflict)

  • Finally, we see a lot of ‘informal measures’ by states like China that use their control over their economy to push for boycotts of foreign products in case of a political dispute. This week we saw China CCTV station not showing the NBA game that starts the season, something which it traditionally does. (more on this issue)

The increase in the number of actors using economic statecraft and the fact that the US policymaking is increasingly becoming more erratic under present Trump makes that we can expect more political disruption in the near term.

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Basketball politics

How China instrumentalizes its market for political gain

Friday, October 11, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

This week we focus on how China is using its market as a political weapon.

Please share this newsletter with any friends or colleagues you think might be interested.

Welcome to a new week of Political Disruption!

Hans

(You can also follow me on Twitter: @hans_diels or LinkedIn: https://www.linkedin.com/in/hansdiels)

Andray Blatche shoots over the Chinese (now former) Houston Rockets player Yao Ming.

What happened? Last week China added a new scalp to its belt. The NBA hurried to apologize to China because one of its members, Daryl Morey manager of the Houston Rockets, tweeted an image supporting protesters in Hong Kong. The tweet was quickly removed.

The NBA apologized quickly but it did it differently in English than in Mandarin. In English they stated they recognized:

"that the views expressed by Houston Rockets General Manager Daryl Morey have deeply offended many of our friends and fans in China, which is regrettable,”

But in the Chinese version they went much further and recognized that support for democracy protesters is really inappropriate:

“We feel greatly disappointed at Houston Rockets’ GM Daryl Morey’s inappropriate speech, which is regrettable. Without a doubt, he has deeply offended many Chinese basketball fans."

Too late? But the NBA’s kowtowing to the Chinese seemed to have come too late. Chinese firms (sportswear brand Li-Ning and Shanghai Pudong Development Bank) halted their cooperation with the Houston Rockets as did the Chinese Basketball Association. Chinese tech-giant Tencent also suspended all streaming of Rockets’ games. The Houston Rockets were very popular in China because a few years ago they fielded a Chinese player Yao Ming (see picture).

Why does the NBA care about China? Almost 500 million Chinese watched American basketball through Tencent platforms last year. In July this year the NBA and Tencent concluded a streaming deal worth billions of dollars.

Is this a new Chinese strategy? China has weaponised its market for political gain in the past multiple times. And Western firms have been apologizing to the Chinese for a while. A few examples:

  • American airlines have already changed their naming of Taiwan on their Websites and publications to get the Chinese of their back. They changed the name 'Taiwan' to 'Taiwan, China' on their websites, thus confirming the one-China policy against the claims of an independent Taiwan. The Chinese government had threatened to deny access to Chinese airspace to the airlines that did not adapt.

  • The clothing retailer GAP apologised for an 'incorrect' map on one of their T-shirts. They used a map from China without Taiwan.

  • The American hotel giant Marriot International was also forced to take its website and mobile app offline after a survey had listed Hong Kong, Taiwan, Tibet and Macau as separate countries.

The power of the market. According to Bloomberg, China became the biggest retail market in the world in 2017 and this gives the Chinese government enormous power to push multinational firms that need its market to avoid any action that could offend the government. The most sensitive issues have been:

  • Anything related to the rule of the CCP

  • Any questioning of the territorial integrity of China (including Tibet, Taiwan, Macau and Hong Kong)

We can expect other firms to avoid hurting the feelings of the CCP and be less brave than Mr Morey (initially) was in standing up for their values. But this kowtowing to the Chinese might become less popular at home in the US where criticizing China is one of the few things that can get bipartisan support nowadays.

Political Disruption: Trade Update

Brexit, China, Japan, South Korea and the EU?

Friday, September 27, 2019

Political Disruption brings you insights on how the fast-changing global political environment is creating a political disruption of business.

Good Morning!

This week we give you an update on the trade wars that are brewing. These conflicts encompass countries responsible for half of global GDP (US, UK, EU, Japan, South Korea).

Welcome to a new week of Political Disruption!

Hans

(You can also follow me on Twitter: @hans_diels or LinkedIn: https://www.linkedin.com/in/hansdiels)

US-China Trade War

Forecast: Ambiguity over the aims of the trade conflict (on the US side) and its embeddedness in the broader geopolitical rivalry between the US and China leads us to forecast more turbulence in the trade relationship, no substantial deal and much uncertainty. We expect in the medium and long-term more tariffs, sanctions, investment and export controls.

A few weeks ago I argued why the prospects of a final negotiated solution to the trade war between the US and China are nihil given US ambiguity over its preferred outcome and the geopolitical linkages of the conflict. (read it again here).

At this moment US and Chinese officials are preparing for higher-level talks that would be held in early October. There have been some positive gestures with the Chinese buying US agricultural products again and the US exempting 400 Chinese products from tariffs. However, we remain pessimistic about the prospects of a substantial deal. in addition, President Trump declared that he did not think he needed a deal for his re-election:

I don’t think I need it before the election. I think people know that we’re doing a great job,” 

Brexitland

Forecast: Uncertainty remains very high on Brexit. A hard Brexit on October 31 is still not off the table but became less likely given new parliamentary options to constrain the PM or force him to resign. After new elections (probably November/December) a Johnson victory is still possible and with it a hard Brexit. An opposition victory would probably (if they succeed in forming a government) lead to a softer Brexit (single market/customs union).

UK Supreme Court (https://www.flickr.com/photos/faundez/3921112328)

What has happened? The UK Supreme Courte ruled that it was unlawful for PM Boris Johnson to prorogue parliament. It argued that:

prorogation has the effect of frustrating or preventing, without reasonable justification, the ability of Parliament to carry out its constitutional functions as a legislature and as the body responsible for the supervision of the executive.

While Boris Johnson said he would abide by the ruling he also said he “profoundly disagreed” with it, setting the stage for a ‘people vs. parliament and judges’ election.

Is this important for Brexit? Now parliament is meeting again, it can come up with new ways to force Johnson to choose between resigning or humiliating himself by asking Brussels for a Brexit extension.

What’s happening now? Johnson is still trying to reach a deal with the EU, he has already abandoned the idea of frictionless trade over the Irish border floating a hybrid system using technological solutions to perform product checks away from the border. Northern Ireland would partially align with EU rules on food and agricultural products. In this way, health checks on the border could be eliminated. As agriculture accounts for only 30% of north-south trade in Ireland, there would still be border controls for 70% of trade, creating a formal border.

Why is the EU playing this so hard? The European Single Market is based on the principle that goods can travel freely between member states and that they all have to conform to the same standards. All goods that are produced outside the single market have to demonstrate they conform to EU standards. Even if the UK would be able to agree on some kind of mutual recognition agreement with the EU (as the UK’s standards are at this moment exactly the same as the EU’s), a soft border in Ireland would create a risk that products from third countries (e.g. China or the US) could come into the EU without appropriate checks.

What will happen next? No one really knows.

  • But the prospect for an agreement on Boris’ terms seems more weakened given his weak domestic position.

  • The deadline remains October 31, unless Johnson requests an extension (and the EU grants it). Johnson could still refuse to ask for an extension, creating a lot of havoc in the UK’s political system, but realizing a hard Brexit.

  • But without an agreement or an extension request, the default option is still a hard Brexit on October 31.

  • The most likely outcome is an extension to January 31, but then the Brexit saga just continues…

Japan-South Korea

Forecast: We don’t expect the issue to be solved before South Korea’s legislative elections in April next year. After the elections, a solution becomes more probable. Before that, we can expect more formal and informal measures taken by both South Korea and Japan that will further disrupt trade between the two.

How did it start? Japan and South Korea are engaged in an escalating conflict that risks disrupting supply chains in East Asia. Last autumn South Korea’s supreme court awarded damages against Japenese companies for forced labour during the second world war. Japan thought this issue was already settled through a 1965 treaty and the compensation Tokyo paid to Seoul. South Korea disagreed, arguing that individual claims can still be processed in court.

What happened next:

  • Japan imposed controls on chemicals required by South Korea’s semiconductor manufacturers.

  • Seoul declared it will end the intelligence-sharing agreement between Japan and South Korea.

  • Tokyo removed Seoul from its ‘white list’ of trusted trade partners.

  • Seoul filed a complaint at the WTO over Japan’s export restrictions.

  • Consumers in South Korea boycott Japanese products. Koreans cancelled their holidays in Japan and sales of Japanese cars halved compared to last year.

US-EU: The coming trade war?

Forecast: While a minor escalation is possible and new tariffs can't be excluded, we expect no major escalation of the trade war between the EU and the US.

Phil Hogan, the new European Commissioner for external trade starting in November

What happened until now? The EU was hit by US steel tariffs of 25 per cent on steel and 10 per cent on aluminium products under national security grounds. The EU retaliated on $3.2 billion US ‘iconic’ products (Harley Davidson, bourbon whisky, blue jeans…) with tariffs from 10-50% (list).

What’s coming up?

  • Cars. In mid-November, a report will be published deciding whether automobile imports in the US are a national security threat. This could lead to tariffs on all cars and car parts coming from the EU.

  • Aircraft. Tit-for-tat tariffs could also come up due to the Boeing-Airbus subsidy disputes at the WTO.

  • Wine and digital services. The US is still considering punitive tariffs on French wine in retaliation of the French plan to impose a digital services tax on US firms.

Towards a Japan deal? The US closed a deal with Japan, with agricultural market access (to Japan) in exchange for some minor concessions on industrial tariffs (by the US) and an unconvincing promise by the US not to impose car levies. It seems very unlikely that the EU would agree to such an agreement.

Leverage. The EU has also a lot more leverage than Japan, but also than China. According to data from the Office of the U.S. Trade Representative, the U.S. imported $683.9 billion of EU goods and $557.9 billion from China. So the amount of goods that can be targetted is roughly similar. However, US exports to the EU reached $574.5 billion, compared to only $179.2 billion to China. This implies a lot more potential retaliation in case the EU-US trade war would really escalate. The question is whether Trump would risk a second front in the trade war in an election year when the US economy is already slowing down.

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