A Short Precis on the US-China Conflict

The US-China conflict is nothing new to the eyes of financial analysts. It was foreseen that unemployment rates in the US, in tandem with China's slowing down of its currency appreciation, would lead to currency wars, trade wars, and protectionism (Roubini, World Economic Forum, 2011) - dim predictions that unfortunately became reality in recent years. Coupling this with a failure to concoct an effective strategy toward China as a responsible trade partner in emerging electronics technologies gave birth to an economic competitor with the potential to dominate (and surpass the US) in such industries (e.g. in the semiconductor arena). 

US-China ties are indeed strained over complaints that China's industry development tactics transgress US free trade agreements and in effect hurt US-based companies. As a means of retaliation, tariffs were imposed on about $50 billion in Chinese imports which resulted in damaging blows to the Shanghai and Shenzhen Composite Indices. China  responded by raising import duties on a $34 billion list of US products such as soybeans, electric cars (a nascent technology that holds promise with quantum leaps in self-driving), and whiskey. (Soybeans and whiskey are agricultural products and are not the central issue in the US-China trade conflict, but neither party/country is prepared yet to address this "elephant in the room").  In the end, China had stopped buying U.S. soybeans,  which increased U.S. soybean exports to the EU (with Brazilian soybeans replacing the yawning gap for China). The US and China has basically just "moved things around" (i.e. targeted other prospective trade partners with their imports). (Ornitz, SNL Bank and Thrift Daily, 2019)

In the event that China were to strike back, the US threatens to hit on another $100 billion of Chinese imports. This may lead to a series of attacks from both sides with  no end in sight if no consensus is established to solve the dispute.

Such quarrels have had ripples on APEC (the Asia-Pacific Economic Cooperation), which for the first time failed to publish a unanimous statement for its 2018 meeting due to the escalating crisis. Some are now having dismal outlooks on US-China relations, as China is poised to significantly outspend the US through its Belt and Road Initiative, the Asian Infrastructure Investment Bank (which hopefully does not commit the same mistakes the mortgage banks of the US did given the number of vacant apartments and unoccupied condos in China) and export-credit financing vehicles (where there is a lot of room for bubbles and economic crises - another impending danger with China that the US should be concerned about - when it comes to these kinds of exotic financial vehicles, but that is for another story).

The Arrest of the Daughter of Huawei's Founder 

Huawei's global CFO was arrested in Vancouver Dec. 1, 2018 (on behalf of U.S. authorities), to be extradited to the US for charges filed by a Brooklyn federal court over violating Iran sanctions. The U.S. had been investigating Huawei, the 2nd largest smartphone manufacturer in the world behind Apple, since 2016 for exporting U.S. products to Iran and other sanctioned countries. 

The arrest of the daughter of Huawei's founder did not sit well with the Chinese. Accusations are pointing to the US for trying to impede competition by setting back the world's second largest manufacturer. 

Is the Semiconductor Industry Affected? Yes.

Immediately after the arrest, consequences were felt by Huawei's supply chain. There was a 3% drop in stock prices for QUALCOMM, Inc.(NASDAQ: QCOM) and a 2.4% drop in stock prices for Intel Corporation (NASDAQ: INTC) in the exchange.

An Analysis of the Economic Trade Allegations

There are a number of accusations China must clear its name of before its trade relations with the US returns to amiable levels (if it ever was). One of which is the clandestine pilfering of intellectual property from US companies (which will be given more spotlight in this article). The other topic which borders on non-compliance with sanctions is more difficult to analyze as politics is more involved so will not be a focal point in the discussions to come.

Huawei is infamous for its alleged stealing of IP material. It's a running joke among network engineers that if a Huawei router is booted, you'd see a CISCO logo in the bootloader (since Huawei copied CISCO's code verbatim - which is rather convenient to CCNAs and CCNPs as they wouldn't have to peruse another set of command manuals for programming Huawei routers).

Due to this disdainful image earned by Huawei, it is now also being accused of programming its devices to steal information from core networks in the US (or designing its hardware to do so).

This sounds like something Huawei would do given its "ends-justifies-the-means" approach and  close ties to the ruling communist party in China. But is something of this scale really possible or feasible? Routers are built to efficiently execute network layer protocols in hardware (notice how if you program a hub or VPN or other host to work as an access point, the connection seemingly gets slower - this is because each node introduced in a network adds milliseconds of delay). The protocols that work in a router are so robust adding something as complex as furtively re-routing traffic to an external node even in short bursts of time is a tremendous effort that may overheat the router. The additional circuitry required would be too conspicuous to bypass inspection. There is also the option of running a secret "telnet" connection, but again to access a packet and read it would require the same amount of traffic (and this is under the assumption that the desired packet is being read - it could just be a junk UDP image of a juvenile doing a Fortnite dance).

There is an easier simpler way of sabotage to routers or any network device if Huawei desires it, and is very similar to those "self-destruct" buttons built in robots or spaceships. Any electronic device, especially routers, are made by man and are not tested against deliberate pre-meditated flaws in its architecture (i.e. they were only designed to circumvent bugs introduced during operation or consumer use). This means any other deliberately erroneous feature introduced to its system can break it down and cause a 'service outage'. This kind of feature can be used as a remote "self-destruct" button instigated when a secret "telnet" connection is established (and may need a more secure high-level encryption algorithm to avoid being undesirably exploited by any 3rd parties). Doing so undeniabley spells ruin to the manufacturing company as both consumer trust and rating will go down the drain. But it's still a peril US-based telecommunications companies should be wary about.

The Wholesome yet Ineffective Solution: Innovating Faster than China
The US can see the current conflict as a challenge to its technology sector, a challenge to its engineers - spurring them towards new heights of innovation. Copyright, shmopyright! Who needs intellectual property if you can improve on it continuously (probably what Nikola Tesla had in mind when he came up with the blueprints of all his great inventions). After all, if one is not the brainchild of the idea, he/she would find it harder to open new avenues for improvement (or expound/digress/ramify on more meaningful arguments) from that idea. But this would most probably leave the US with the same fate Nikola Tesla endured during his twilight years.

The Unwholesome yet Effective Solution: Design a Hidden Vulnerability in the I.P.
Similar to making a "self-destruct" button, putting a vulnerability in an IP that does not need to be self-destructive (at the very least identifiable perhaps? like a spike in circuit current) can determine whether a competitor has infringed on the IP in question.

For example, company X copied an ASIC that innovates on its quiescent mode by dubiously using auto-regressive conditional heteroscedastic algorithms to analyze the load's power consumption (which is probably not stochastic and not worth the additional circuitry) from company Y. To check whether the IP has been stolen, company Y integrates a unique test mode feature built-in to the ASIC that spurts 10mA spikes at 2ms intervals on a designated pinout when the aikake criterion reaches a certain threshold. There is a high probability that company X indeed stole the IP if the same behaviour is observed on their version of the ASIC.

The Undiplomatic Solution: Coveting Taiwan
Many articles that cover the US-China dilemma fail to mention the possibility of winning over Taiwan. The most notable foundry outside the US (TSMC) is based in Taiwan. If it can keep/isolate Taiwan away from China, it will deal a heavy blow and significantly impede China's development in the semicon. sector (though the fabless revolution can serve as a game-changer in the near future).

Reconsidering Security of Imported Electronic Devices
The most reasonable amicable course of action for the US in my opinion is to establish standard testing procedures on foreign electronics devices and equipment. The more complex the system, the easier testing will be because complex systems tend to follow a set of rigid protocols/standards that cannot be altered without severe consequences to system performance or behavior. This entails additional costs for a governing body to oversee such activities (testing may either be mandated to commercial companies themselves, or partially subsidized by the government from taxpayer's money) but if it gives the American people some peace of mind then why not?

What other measures do you think the US could take to minimize risk of espionage/sabotage from foreign entities outside American law/jurisdiction?








References

Balboa, E. (2018, Dec 06). Huawei CFO arrest fuels US-china trade tensions.Benzinga Newswires

Caldwell, K. (2011). Roubini sees threat of US-china currency war. Investment Week, , 14.

Clouse, T. (2018). US-china trade spat hampers APEC cooperation. Global Finance, 32(11), 8.

Ornitz, J. (2019). Why US-china trade negotiations may fail. SNL Bank & Thrift Daily


US-china trade war escalates. (2018, Jun 26). The Financial Daily.

Ward, J. D. T. (2018). 3 things to understand about US-china dynamics.CFO.Com

Maire, R. (2018). Could China Conflict Curtail Chip Comeback? Part 2
https://www.semiwiki.com/forum/content/7890-could-china-conflict-curtail-chip-comeback-q-part-2-a.html

Huang, C. (2019). This election, Taiwan must choose: Chinese cash or American freedom
https://www.scmp.com/week-asia/opinion/article/3004896/election-taiwan-must-choose-chinese-cash-or-american-freedom
Maire, R. (2018). China Trade War is accelerating with First Blood in Chips