According to a Bloomberg report, the Trump administration is planning to utilize $60 billion funds earmarked for the U.S. International Development Finance Corporation (“DFC”) to thwart China-based telecom equipment manufacturers Huawei and ZTE. The move is the latest in a string of concerted efforts by the U.S. government to dissuade other sovereign countries from using Huawei and ZTE gear to preempt alleged spying and siphoning of data.
This is likely to create new business opportunities for other telecom equipment manufacturers like Nokia Corporation (NOK - Free Report) and Ericsson (ERIC - Free Report) . With increased commercial deployment of 5G technology across the globe, the purported step is likely to create a level playing field and deter China-based firms from dominating the market.
The Multi-Faceted DFC
Formed by the merger of Overseas Private Investment Corporation and the U.S. Agency for International Development’s Development Credit Authority, the DFC is a federal agency that aims to help address development challenges and foreign policy priorities of the United States. It primarily seeks to catalyze much-needed private sector investments in low- and lower-middle-income countries through new development finance tools such as local currency loans, first-loss guarantees and equity investments.
DFC aims to strengthen the position of the United States in the global development stage, with greater ability to partner with allies on transformative projects and provide financially-sound alternatives to potentially damaging state-directed initiatives. Ingrained in the U.S. foreign policy and national security architecture, the agency also helps to safeguard national security interests by aligning more closely with other federal units to better leverage resources. It is reportedly mulling to become a founding investor in a new technology infrastructure fund to patronize emerging firms in 5G, AI, quantum computing and other areas to curb Huawei’s dominance.
Seeds of Mistrust
The United States has long suspected Huawei to be an extension of China’s government due to the close ties of its founder with the military. Moreover, the fact that Huawei products are remarkably cheap owing to the huge subsidies by the government to undercut other 5G equipment manufacturers has perennially evoked a feeling of mistrust. Jim Lewis, a cybersecurity expert with the Center for Strategic and International Studies, observed, “… the Chinese government is not paying hundreds of millions of dollars to build another country’s telecom infrastructure because they admire its cuisine.” Huawei was also accused of trade secret theft at the behest of R&D team based in China by T-Mobile US, Inc. (TMUS - Free Report) .
The U.S. government officials are devising ways to better encrypt communications to thwart snooping attempts. In addition to robust communication networks through anti-spying mechanism tools, the Homeland Security Department has launched a supply chain initiative to secure the telecommunications and other key industry sectors. The Pentagon is also reportedly working on ways to segregate vital communications to eliminate the risks from compromised networks.
However, such technical fixes are beyond the reach of several countries as they lack both the technological and financial capabilities and have to largely depend on the low-cost Huawei equipment for developing the 5G infrastructure. It appears that the DFC now aims to fund various initiatives by other sovereign countries to debug the system.
Is Such a Ploy Warranted?
The superfast 5G networks are widely expected to facilitate the transfer of a larger pool of data, making them more vulnerable and prone to cyber theft. 5G is also likely to result in $12.3 trillion of global economic output by 2035 (per data from research firm IHS Markit). Critics contend that countries could go to any extent to gain a greater pie in this trillion-dollar market in order to have a political, economic and technological advantage.
The United States has extensively used its diplomatic channels in the past to urge its allies to shun Huawei from their 5G wireless networks, citing security threat and espionage by China’s government. The government now seeks to undertake a more proactive measure to fructify its ploy by possibly leveraging DFC tools to support purchases of non-Chinese telecom gear by issuing credit to Huawei’s European rivals. Industry grapevines further hint that DFC could also take minority equity stake in companies and offer loans, loan guarantees and political risk insurance.
Adam Boehler, the first chief executive officer of the DFC, perfectly summed up, “We want to make sure that the next crop of companies, if they’re not U.S.-based, that they at least adhere to the principals we care about -- the rule of law and data protection.”
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