When talking about "the internet," most of us visualize an interconnected web of computing power with global reach. A ubiquitous network.
However, that's not quite accurate.
Anyone that's touched down on an airport tarmac in mainland China probably understands how "the internet" as a singular, global concept doesn't really apply in Asia’s largest country.
Foreigners arriving for the first time in China are quickly hit with several stark realities, especially as it relates to their digital existences. The first discovery, which typically materializes as a mild annoyance, is that your email service won't deliver.
Next, the newbie foreign internet user in China usually finds that their social media apps aren't updating. That's when the mild annoyance starts to build steam - like those times you've misplaced your phone and are just beginning the search.
Last, right before giving up altogether, the foreigner (feeling more foreign than ever) discovers that pretty much all of his/her favorite news-related websites are also blocked.
The end feeling is basically one of digital isolation - because in less than 5 minutes your high-tech, "smart" device has essentially been transformed into a flip-phone, circa 2006.
But hey, at least the camera still works!
While it may sound hard to believe, this is the reality of people (locals and foreigners alike) living behind the Great Firewall - the catch-all name attributed to the comprehensive effort by the Chinese government to censor certain types of news and information (i.e. data) in the People's Republic of China.
And while several other countries on earth also censor the internet (to varying degrees), the overall effort and impact are miniscule when compared to China - mainly due to scale.
Aside from a population of approximately 1.5 billion people, which account for roughly 17% of the total human population on earth, China occupies nearly 6.3% of the total land area on the planet. Lastly (but not leastly), China's economy is massive - second only to that of the United States.
Going back to our first-time traveler in China, it’s usually while staring off into space at the baggage claim, that he/she makes a fairly profound realization - an understanding that nearly 1/5th of the people on earth are living a completely different digital existence than the other 4/5ths.
No matter how you cut it, that's a critical differentiation, and one with far-ranging implications.
At this point, you might be wondering, "but I don't live in China, so that doesn't affect me!" Well, yes...and then again...no.
In terms of global technology and innovation, and even trade wars, it might affect you quite a bit. Especially technology enthusiasts, and even more so, investors.
Consider for a moment the fact that Google.com search isn't available in China.
That fact alone means Alphabet (the parent company of Google) can at most penetrate only 83% of the global market for internet search. That's because 17% of the market (i.e. the entire Chinese population) effectively represents "forbidden fruit."
So Google.com doesn't work in China - you're still not convinced this is a big deal. Let's consider some of those other far-ranging implications.
The thing is, blocked websites aren’t the end of the story in China - in fact, they’re more like the beginning.
While foreigners in China grind their teeth in frustration, the local Chinese are meanwhile feeding their digital cravings with websites and mobile applications (i.e. “apps”) that most people outside of China have never seen or heard of before.
And it’s not because the app names have been translated into Chinese characters. It’s because they’re completely different.
When was the last time you used IQIYI, Meituan, or Tik Tok?
The answer to all three is likely never. And on any given day in China, those are three of the most heavily used mobile apps in the country.
The fact is, the Great Firewall has served to not only censor information/data, but it has also (inadvertently or otherwise) worked to stifle competition in China's technology sector. On the flip side of the coin, locals might argue it has allowed the local internet economy in China to thrive.
A perfect example of the thriving local internet economy is the most heavily used search engine in China - Baidu.com. But there’s a caveat - even most Chinese one meets on the street admit that if Google.com were available in China, Baidu.com would struggle mightily to exist - at least in its present form.
Baidu.com is currently the fourth overall most-trafficked website on the globe. This company serves as a great example of the both the pains and gains of the Great Firewall.
As a side note, it's been rumored for some time that Google is currently working on a modified search engine for China that meets the stringent parameters of government regulators. That may be one reason that Baidu's stock (BIDU) is currently trading on 52-week lows, while many of the other technology stocks in China aren't yet probing those depths (though some are getting very close).
Regardless, the point is that the Chinese internet economy has thrived, and largely without much representation from “Western” companies.
Sitting alongside Baidu (and arguably above), are other Chinese tech giants like Alibaba (BABA), JD.com (JD), and Tencent (TCEHY). Together these are effectively Amazon (AMZN) and Facebook (FB) rolled into three.
One could easily argue that the existence of strong Chinese technology companies is also due to the fact that China boasts a lot of smart citizens, with strong educations. Likewise, the language barrier between China and the rest of the world represents a considerable hurdle for foreign companies.
What can't be argued is that the internet space in China would look vastly different if foreign companies were actually allowed to compete in the market.
For example, looking at the top 30 most-trafficked websites on any given day, it's easy to see how the Great Firewall has contributed to the current competitive landscape of "the internet."
Of the top 30 most-trafficked global websites, 15 are of American origin, 11 are Chinese, 3 are Russian, and 1 is Japanese. In practice, that means all 30 of those sites can be accessed almost anywhere outside of China, while only 11 of the 30 can be utilized inside China.
It's that perspective that adds further insight into the current trade war between the United States and China, which at the moment is the "spoon that stirs the drink" of international financial markets.
And that drink is currently experiencing some heavy stirring.
Alongside the trade war (or right in the middle of it, depending on your perspective), there has been a drama unfolding that has ensnared one of China's most prominent technology companies - Huawei.
While most people in the United States aren’t too familiar with Huawei, this company has quietly become the second-largest producer of smartphones on the planet (after Samsung). Even in a so-called "maturing market," Huawei has been driving big growth in the market.
Aside from handsets, Huawei also manufactures the equipment used in telecommunications. In the modern era, this basically represents the backbone of the internet. Huawei has innovated admirably in this market, and offers competitively priced products and services.
Tying this all back to the trade war, the US government recently blacklisted Huawei from selling their telecommunications goods in the United States - for reasons attributed to national security. And the US has been encouraging their allies to do the same (with varying degrees of success).
The reasoning behind the ban has been publicly linked to a complaint that Huawei (and more importantly, the Chinese government) could theoretically monitor communications moving across the network. The United States has argued that this possibility represents a national security risk. Ironically (or unironically), "national security" is the same reasoning used by the Chinese government in their defense of the Great Firewall.
Regardless, one can see how the current tussell between the world's two largest economic powers encompasses much more than simply imports and exports. The United States houses plenty of high technology firms that are keen to participate in the proliferation of 5G networks. Companies that are competing fiercely with Huawei.
Looking more holistically at the competitive environment in global technology, one can’t blame the Chinese for trying to brand the 5G global network as their own. When it comes to personal computers and smartphones, those operating environments are already dominated by Microsoft, Apple, and Google (Android). Companies that bleed red, white and blue.
It's therefore probably no coincidence that the Huawei news (being blacklisted from the United States) emerged only after the recent "truce" between the United States and China was effectively called off.
This is also why many journalists and investors are starting to characterize the trade war between the United States and China as a “tech war,” with a “digital iron curtain” between them that appears to be adding more bytes.
As one can see, the two countries possess vastly different technological landscapes that are supported by different systems and actors. As these apparatuses have innovated and started to grow beyond sovereign borders, there has been increasing competition and friction.
In short, these developments have further complicated the relationship between the United States and China. Complexities which are now playing out in the form of a potential trade agreement - a vehicle which ultimately probably isn’t robust enough to address all points of contention.
Is the United States using Huawei as a pawn in the trade war? Or is the recent action against Huawei simply a good illustration of how a trade agreement, even a comprehensive one, probably won’t go far enough in producing a playing field considered “level” by both sides.
Alternatively, it feels a bit like the US and China are just sitting down to contest a marathon chess match. One featuring a series of mini-confrontations, playing out over many years, with each side experiencing gains and losses while attempting to impose their own vision of an “endgame.”
According to that perspective, the current trade war negotiations probably at best represent the opening salvos - with the true designs of each player not yet revealed.
In the near-term, it will be interesting to see if economic or political pressure forces one of the sides (or both) to narrow their list of grievances and meet halfway - basically a swap of bishops or knights - while other pieces on the board are repositioned for a more substantial confrontation down the road.
With the US Presidential election looming in 2020, that possibility certainly can’t be discounted. Another catalyst for a short-term truce might be further deterioration in the Chinese economy, which could put the broader global economy at risk of “catching a cold.”
Above all, there appears to be only one certainty at present. Heightened volatility associated with the breakdown in trade war negotiations has produced a myriad of new opportunities for active traders. And this dynamic trading environment looks like it could persist for some time.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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