Cold War in Hot Technology

By Shlomo Maital

  All eyes are now on Ukraine, and on Putin.  Will he or won’t he invade?  The consequences will be immense either way.  The Cold War has returned, with a vengeance, and threatens a Hot War.

    But as always, there are matters of enormous significance buried behind the daily reports from the Ukrainian border.

     A new Cold War is developing in the world’s hot technologies.  And I don’t think it will end well.

      As often occurs the best source for this is The Economist weekly.    Writing in the latest issue, Ludwig Siegele, European business editor and a veteran journalist, identifies a disturbing new Cold War between Russia, China and the United States, in new, powerful hot technologies.

      “America’s package of potential sanctions aimed at deterring Russian aggression includes not just financial measures such as cutting off Russian banks from the Western financial system, but also denying it access to American technology,”  notes The Economist.  Cutting off US technology could be more painful than financial sanctions.

     The Economist notes:  “Since the invasion of Crimea in 2014 triggered an earlier round of Western sanctions, Russia has sought to construct a fortress economy. In the financial realm this has involved de-dollarization: shifting contracts, reserves and borrowing to other currencies. The share of cross-border invoices paid to Russia in dollars has dropped from 80% at the start of 2014 to 54%.”

     “Less well explored is how Russia, with one eye on China, has sought to indigenize its tech industry.  Moscow is implementing a systematic plan to build what scholars of geopolitics call a “stack”: a sovereign digital space made of layers stacked atop each other like a tiered cake. These layers include hardware, the cloud, apps, identity and payments. In some areas it has made leaps. Six of the ten biggest cloud firms in Russia are now Russian, for example. The Mir payments system has a market share of 25%. Russia is building a national version of the global domain-name system. From telecoms networks to apps, more of the industry is owned by Russian firms than was once the case.

       “Whether the steps taken so far will insulate Russia from Western sanctions is doubtful. Last week my colleagues visited the boss of a big Russian tech firm in Moscow who said that the authorities “are trying to create an impression that [the industry] is self-reliant. This is not true.” His servers and systems still rely on Silicon Valley. Yet in the long run it seems likely that Russia will redouble efforts to reduce its dependence, by buying more components and software from China and by making more at home. That will lead to a less efficient but less vulnerable digital economy.”

     “We calculate that US exports of IT services to Russia rose by 183% in the five years before the invasion of Crimea in 2014, and by 0.5% in the five years after it.”

     And what about China?

     “Huawei has been the subject of an exquisite torture in the form of American sanctions and controls, limiting its access to cutting-edge chips and other services such as phone software. The cost has been severe: Huawei’s sales in 2021 dropped by 29%. Both the Trump and Biden administrations have blacklisted ever-more Chinese tech firms. A desire to escape America’s grip has in turn accelerated China’s drive to indigenize its tech industry. SMIC, the home-grown semiconductor champion, reported sales growth of 61% year on year in the most recent quarter, and this year its capex will be more than double the level in 2019.”

    And the US?   Intel is building new chip plants in Arizona and New Mexico.  It just acquired an Israeli chip maker, Tower.   Taiwan, the world’s leading chip maker, is strategically aligned with the US, while facing Chinese threats. 

     We are moving inexorably from a world system built on the principle of comparative advantage – buy from those what they do best, sell to them what you do best – to autarchy and mercantilism —  buy and build only within your borders. 

      This is very bad for the world. Here is why.  Europe fought two bloody wars within 30 years.  They made peace through trade.  Let’s grow wealthy together, European countries said, and formed the European Union.  Economic and business competition, to replace military conflict.  It has worked well.

       Closing nations off from commerce with rival nations is driven by fear and hostility.  Nations that do not trade freely and openly, may one day fight bitterly and bloodily.  By erecting high borders to technology, nations will limit communication and understanding. 

       China. Russia. United States.  A new Cold War in hot technologies.  The consequences may make an invasion of Ukraine pale in comparison.