CFIUS And A Tale Of Two Internets

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CFIUS And A Tale Of Two Internets

The global divide toward a more fragmented internet may be closer than most businesses realize

At the convergence of globalization, economic competition, and national security is the technology industry – with key segments ranging from semiconductors to 5G to quantum. The US-China great power competition, which is set to dominate the next generation of big tech, may change the internet and the market for international investment as we know it.

Within weeks of one another, the United States and China unveiled similar cyber sovereignty programs regarding data privacy and network infrastructure. On August 5th, 2020 the Trump administration announced the Clean Network Program, a comprehensive approach to protecting US citizens’ privacy and American companies’ most sensitive information from malign actors, specifically the Chinese Communist Party (CCP). The Clean Network aims to ban all Chinese influence and businesses from its telecom carriers, cloud services, undersea cables, apps, and app stores.

A month later China’s Foreign Minister Wang Yi unveiled a new program as well, the Global Initiative on Data Security. The initiative parallels the Clean Network Program, outlining data privacy concerns for Chinese citizens and businesses and urges governments to respect other countries’ cyber sovereignty, whereby countries exercise full control in their corners of the internet.

It remains presently unclear how either policy will be implemented in the long run, but some have compared Trump’s Clean Network Program to China’s “great firewall”, while others argue it’s more posture than policy. Could it be more than that?

Tech leaders have long cautioned against governments dictating internet data flows based off political considerations rather than technical ones — an idea commonly referred to as the “splinternet”. However, the global divide toward a more fragmented internet may be closer than most businesses realize, specifically, how the Committee on Foreign Investment in the United States (CFIUS) interprets cyber sovereignty could impact investment activity as well as research and development.

The Clean Network Program enables the US government to dictate how its citizens and businesses will access the world wide web. The Program is an expansion of the White House’s 5G Clean Path initiative, which previously banned Huawei and ZTE from America’s 5G infrastructure. America’s allies like Japan, Australia, New Zealand and Taiwan also banned Huawei’s equipment in their mobile networks. The UK banned the company from contributing critical parts to its 5G network. Yet Huawei signed agreements to offer 5G services and trials in many markets in Asia and Europe, a risk many tech leaders consider a step toward a more segmented internet along localized infrastructure.

CFIUS’ recently expanded authority captured headlines last year, but the Committee has blocked transactions shaping US network infrastructure for over a decade. When Huawei proposed investments in the US in 2008 and 2010, it was considered the world’s largest telecom equipment maker, but concerns over national security led CFIUS to thwart both transactions. Investors planning a joint venture or other investment activities should also keep in mind that CFIUS has jurisdiction to review any foreign investment, even retroactively cleared transactions.

While the future of 5G is still developing, there must be a recognition that the competition is reliant on the underlying technologies – from R&D to maintenance and to ultimate deployment. Within these broad categories both governments and operators should prioritize the security standards around these concepts that are ingrained on the pillars of security, stability, capacity, and speed. In context, 5G is considered one of the many ways the internet can be ‘splintered’, with other areas including software, infrastructure, and network architecture.

Dealmakers must be cognizant of which countries are falling in line with the digital protectionism and disengagements of the US-China tech race, and to what extent. If both the US and China continue to develop the national-tech policies that create an emphasis on intervention, it will not only challenge the internet’s resiliency and transparency but, could also tremendously disrupt international trade and the global tech industry.

Governments must make choices about the development and application of consistent standards which support R&D to help both domestic and international economies grow and prosper. These choices create the foundation for competition and innovation, while having distinct impact on economic and national security.

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