A Case for Fortifying the BUILD Act: The U.S., China, and Internet Infrastructure in the Global South

Executive Summary

• The BUILD Act signed into law last year by President Trump could be an important strand of a strategy to balance China’s growing influence in cyberspace. China’s state-backed, private sector investments have provided telecommunications infrastructure in virtually every country in the Global South. The infrastructure benefits the recipients but also enhances China’s political leverage in the region. As telecommunications infrastructure is the backbone of the internet, these investments uniquely augment China’s strategic advantage in cyberspace.
• A reorganization plan bringing together USAID’s Development Credit Authority and the Overseas Private Investment Cooperation to form the US Development Finance Corporation (USDFC) is due to be operational by October 2019 and its portfolio will be doubled to $60 billion. However, reports suggest that the USDFC’s financial resources will be much less than originally planned. It took more than 7 years for the Act to get to this stage, and it is imperative that the private sector receives financial support to compete with Chinese companies in developing markets, particularly in sectors relevant to cyberspace. This paper outlines why.
• If any country could be said to “own” the internet, that country would be the United States. The internet was founded in 1969 by the Department of Defense’s Advanced Research Projects Agency. The scientists who invented the internet designed it to run over existing telephone lines. At the time, AT&T was the dominant carrier, so AT&T and the U.S., by extension, dominated the international telecommunications system. U.S. companies that had already adapted to AT&T standards were well-placed to lay the foundations of the internet across the world. Today, however, America’s dominance of cyberspace is under threat at the physical layer for the first time since its invention 60 years ago.
• The internet is often misleadingly perceived as intangible and amorphous. There is an essential physical component that is vulnerable to different risks and should therefore be considered and managed alongside the intangible. Academics who have studied the physical infrastructure of the internet have conceptualized it as seven layers.¹ Layer 1 is the physical layer tied to geography and comprised of the terrestrial cables, fiber optic submarine cables, satellites, and the routers and switches on top of which cyberspace sits. Layers 2-7 are virtual. The significance of the physical infrastructure of the internet and its geopolitical relevance has been merged with wider discussions of the competition in cyberspace between great powers like the U.S. and China.
• China’s strategic approach toward the Global South over the past two decades has resulted in China, not the U.S., providing most of the telecommunications infrastructure in these rapidly developing markets. U.S. telecommunications companies have treated equipment sales for the physical infrastructure of the internet as an economic rather than politically strategic decision. When there was no profit to be made, U.S. companies did not provide the equipment.
• China’s ownership of the physical infrastructure theoretically means that the Chinese government can control it and access information when needed. This access to significant amounts of data gives China an advantage over the U.S. in intelligence collection. Because of this enhanced intelligence collection, China might gain an economic, political, or security advantage over the U.S.

Recommendations:

• Ensure that the USDFC has the resources to support the U.S. private sector’s short-term losses for long-term security gains. Recognize that although the immediate return on investment in the Global South does not make short-term economic sense, in the long-term it will be a good investment. This acceptance needs to be bipartisan and outlive each administration.
• Work with allies. The U.S. cannot compete in telecommunications infrastructure alone due to the basic fact that U.S. companies are not players in all components of the telecommunications infrastructure ecosystem. The U.S. needs to work with allies who have the infrastructure companies and the strong relationships with governments and business in the Global South that the U.S. lacks.
• Build long-term, mutually beneficial partnerships with countries in the Global South that extend beyond aid. It is important to recognize the growth potential in a greater number of developing countries and to upgrade Washington’s relationship from one focused mainly on financial aid and humanitarian support.
• Make cybersecurity an economic incentive. Support a campaign to enhance the cyber security and broader product quality of infrastructure in the Global South. Make security an economic incentive for all international businesses.
• Proactively find new areas to cooperate with China. It is not strategic or sustainable to treat China as an adversary in every area because the U.S.’ global prosperity and security are intertwined with China’s. Carving out less-sensitive areas to partner in are essential to regain trust on both sides.

1. The BUILD Act

The BUILD Act represents a positive shift in U.S. development policy and a strong tool for countering Chinese influence in cyberspace and other areas.

In October 2018, President Trump signed into law the Better Utilization of Investments Leading to Development (BUILD) Act.² A chief motivation for this Act was to improve Washington’s development finance mechanisms and thereby provide Global South with a robust alternative to China’s state-directed, debt-heavy model. The mechanism is not prohibited from working in more developed countries if it is doing so for national security or developmental reasons. A reorganization plan bringing together USAID’s Development Credit Authority and the Overseas Private Investment Cooperation to form the US Development Finance Corporation (USDFC) is due to be operational by October 2019.³ The plan is to double its portfolio to $60 billion.⁴

China’s state-backed, private-sector investments have provided telecommunications infrastructure in virtually every country in the Global South. Chinese companies supplying telecommunications infrastructure in these countries bring many benefits for the recipients, but they also enhance China’s political leverage in the region and uniquely enhance China’s strategic advantage in cyberspace.

A well-resourced USDFC as a result of the BUILD Act will support U.S. companies and provide competitive alternatives for the Global South. Prioritizing U.S. support in the telecommunications sector will also help balance China’s growing strategic influence in cyberspace. However, reports suggest that the USDFC’s financial resources will be much less than originally planned.⁵ These resources are needed to level the playing field. This paper outlines why.

2. Who Owns the Physical Infrastructure of the Internet Now?

If any country could be said to “own” the internet, that country would be the U.S. The internet’s development was funded in 1969 by the Department of Defense’s Advanced Research Projects Agency. The scientists who invented the internet designed it to run over existing telephone lines. At the time, AT&T was the dominant carrier, so AT&T and the U.S., by extension, dominated the international telecommunications system.⁶ U.S. companies that had already adapted to AT&T standards were well-placed to lay the foundations of the internet across the world. Today, however, America’s dominance of cyberspace is under threat, at the physical layer, for the first time since its invention 60 years ago.

What is the Physical Infrastructure made of?

The internet is often misleadingly perceived as intangible and amorphous. However, there is an essential physical component to it that is vulnerable to different risks and should therefore be considered and managed separately. Academics that have studied the physical infrastructure of the internet have conceptualized it as seven layers.⁷

Layer 1 is the physical layer tied to a geography while layers 2-7 are virtual, intangible and not tied to geography. The physical layer comprises the terrestrial cables, fiber optic submarine cables, satellites, routers, and switches on top of which cyberspace sits. The significance of this layer and its geopolitical relevance has been merged with wider discussions in the competition for cyberspace between great powers, particularly but not limited to the U.S. and China. The challenges that face the physical infrastructure and the virtual internet are different but should be treated holistically.

The internet is a network that is redundant, meaning there are many available alternate routes should one route be blocked. However, of the seven layers, the physical layer is the least redundant.

Figure 1: A Crucial Component of the Physical Layer: Fiber Optic Cables

In the 1960s, U.S. spy operations targeted Soviet fiber-optic cables and satellites to intercept communications for strategic advantage. Espionage at the higher levels of the internet is also possible, but it is significantly more challenging to monitor an entire network. For example, tracking an email would require following the individual packets that the email is composed of during transit via adaptive routing. These packets could take manifold different routes before reassembling at a final location. Therefore, ownership of the physical internet offers a distinct strategic advantage because both ends of the cable can be easily monitored.

A submarine cable company needs two things: a factory to make the cables and a ship to lay them. In 1996, there were three dominant submarine cable companies: America’s AT&T Submarine Systems International, France’s Alcatel, and Japan’s KDD Submarine Cable Systems. China lacked the scientific and industrial know-how at the time. Revisiting the sector today, Huawei’s Marine Systems have joined the top ranks of submarine cable providers alongside European, American, and Japanese suppliers.⁸

Why is Power in the Physical Layer more diffuse now?

U.S. telecommunications companies have generally approached the opportunity of supplying equipment for the physical infrastructure of the internet through the lens of economic, not political, incentives. When there was no profit to be made, U.S. companies did not provide the equipment. For a period, developing markets could not afford these products and did not have the ability to manufacture their own, so they were unable to access and benefit from the internet.

However, that has since changed, the size of cyberspace has grown, and the ratio of U.S. ownership has declined as China has entered the market and focused on the Global South. China’s influence in cyberspace is rapidly growing, in part due to its ownership of physical infrastructure. China’s economy has flourished over the past two decades because it has prioritized developing regions in the world and used a whole-of-government approach to manufacturing and supplying telecommunications hardware. China’s influence in cyberspace is reflected in recent U.S. government efforts to constrain Chinese companies, Huawei and ZTE in particular, from supplying into U.S. telecommunications infrastructure.

3. Why China will Exert More Influence in Cyberspace than the U.S.

Between 2000-2019, an estimated 3.3bn⁹ internet users from Africa, Asia, Latin America and the Middle East came online in contrast to only 1.1bn¹⁰ internet users from Europe, North America, and Oceania.¹¹ China’s strategic approach toward the Global South over the past two decades, which has manifested in sales of telecommunications infrastructure, has resulted in Chinese domination of today’s rapidly growing telecommunications markets in the region, edging out international competition for contracts.

In 2018, William and Mary¹² College published AidData, a dataset of Global Chinese Official Finance¹³ which shows that between 2000-2014, Chinese banks, state-owned enterprises, and telecommunications companies invested USD 22.7 bn¹⁴ in credit lines, loans, and equipment in 106 countries to provide telecommunications equipment.

Figure 2: The darker shade of green indicates a higher number of projects (AidData)

(1) China has a Vision for the Future

The Chinese government has a clear vision for China’s future. Since Xi Jinping ascended to the Presidency in 2012, China’s foreign policy has been rebranded as the Belt and Road Initiative (BRI). Official BRI documents outline plans to expand economic cooperation: building factories, roads, bridges, ports and airports, gas and oil pipelines, electric power grids, and telecommunications networks. More than 60 countries, comprising two-thirds of the world’s population, have signed on to BRI projects, and most of these countries are located in the Global South.¹⁵ However, the provision and influence over another state’s critical infrastructure amounts to not only economic returns, but also significant geopolitical advantage.

In 2017, President Xi brought together leaders from government and across industries to announce his plan. There is widespread support for Chinese infrastructure as it does contribute to bridging the digital divide. However, critics have pointed to unsustainable debt levels of some recipient countries, the lack of transparency around procurement for BRI infrastructure projects, and concerns around sovereignty and territorial integrity, notably from the U.S.¹⁶ However, the U.S. has offered no counter vision.

Within the BRI, the Digital element is clearly delineated from the other two prongs of overland and maritime routes. President Xi described this element as a “digital silk road”.¹⁷ These overseas investments also complement China’s significant domestic investments in AI, big data, smart cities, and cloud computing. The provision of telecommunications infrastructure in the Global South is a pillar of China’s BRI vision.

(2) An Industrial Policy and a Strong Public-Private Partnership

The Chinese government can mobilize state owned enterprises and private companies at scale to implement national policy in a way that no other government can. These ambitions are rooted in a decades-old policy to develop national science and technology capabilities so that China would not need to depend on or be at the whim of other states. Some of these technologies have been acquired through industrial espionage, among other methods. These policies of China’s are neither new nor secret.

Huawei and ZTE are the more successful examples of the close relationship between state and industry. Over the past two decades, Chinese telecommunications firms Huawei and ZTE have steadily overtaken Sweden’s Ericsson and Finland’s Nokia as the primary providers of terrestrial (land-based) fiber optic networks in developing markets.

Figure 3: Market Share for Telecommunications Service Provider Equipment¹⁸ between 2013-2018.¹⁹

In 2018, the top seven equipment manufacturers were Huawei, Nokia, Ericsson, Cisco, ZTE, Ciena, and Samsung. Combined, they accounted for 80% of the worldwide market. Between 2013-2018, U.S. firms’ Cisco and Ciena flatlined with a combined average of roughly 10-12% of the market. In contrast, Huawei gained 8%, capturing 29% of the telecommunications equipment market by 2018. ZTE had an average 10% market share for the first four years, but following the U.S. ban on U.S. companies selling key components to ZTE, their market share dropped by 2%. Despite U.S. action, the combined Chinese market share still reached 37%, which is more than a third of the global telecoms market.

Huawei Marine, the arm of Huawei in the submarine cable market, was founded in 2007 in partnership with the UK’s Global Marine Systems, the oldest submarine cable firm in the world. Huawei Marine manufactures cables and has a total of 81 completed projects and 9 ongoing.²⁰ China’s share of the submarine cables market is likely to increase, as key competitor Ericsson shut down its manufacturing base in 2013²¹ and there were reports in 2017 that Nokia plans to sell its submarine cable subsidiary.²²

(3) Implementing a Bold Vision with Massive Financial Resources

In 2017, President Xi Jinping outlined a plan to make China a “global leader” and highlighted the importance of innovation as a primary driving force in this pursuit²³. According to the World Economic Forum, in 2015, China accounted for 21% of the world’s total investment in research and development, which was just behind the U.S.’ 25%.²⁴ Furthermore, Chinese spending on R&D has grown an average of 18% per year between 2010-2015, which is faster than the U.S. At this rate, Chinese R&D spending will overtake the U.S.’ in the next five to ten years.

China’s use of development policy to enhance geopolitical advantage has resulted in generous subsidies that buttress Chinese telecommunications firms in high-risk environments, often in unstable states where other companies would not take the financial risk. As a result, most telecommunication firm incumbents in the Global South are Chinese, which puts them in a prime position to service and provide telecommunication infrastructure upgrades in future.

Chinese telecoms have penetrated the Global South through government-supported financial mechanisms. The Asian Infrastructure Investment Bank, the state-backed Industrial Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank, and the Silk Road Fund of $40bn from the State Administration of Foreign Exchange, China Investment Corporation, Export-Import Bank of China, and China Development Bank, are all mandated by the government to support the Belt and Road Initiative. Currently, American and most other western companies do not have similar support from their governments. However, the USFDC could help to address this imbalance.

Chinese government support mechanisms include tied loans, donations, commercial partnerships, and “no-strings attached aid.” Some of China’s loans require 50% of the loan to be used for purchasing Chinese goods,²⁵ creating a customer base offering massive contracts to Chinese manufacturers to lay the physical layer of the internet across the Global South.

Sometimes developing countries that receive Chinese “aid” cannot pay China back. In a 2018 study by the Center for Global Development, researchers found that, of the 68 countries involved in the Belt and Road, a total of 8 countries were susceptible to debt sustainability problems and that China was the dominant creditor in a position to remedy those problems.²⁶ To be clear, the indebtedness of developing countries as a result of foreign aid loans for political leverage is not a charge solely leveled at China; western countries have also been part of the problem.²⁷

However, China’s role in this indebtedness is particularly acute today because of the scale. China has secured overseas assets through indebtedness between itself and states who struggled to pay their debts, such as Sri Lanka who handed China a 99-year lease to the Hambantota Port in 2017.²⁸ The acquisition by China of strategic assets in the Indian Ocean is of significant interest to other governments. There are other cases like this potentially on the horizon; for example, Djibouti’s indebtedness to China could be a concern for the U.S. and France, who, like China, have military bases located in Djibouti.²⁹

(4) A Multi-Pronged Charm Offensive

Most of the U.S.’ and most other western countries’ interactions with the Global South has been resource extraction and humanitarian aid. In contrast, the Global South has been a consistent geopolitical priority for the Chinese government, particularly Africa. Between 2008 and 2018, Chinese leadership made 79 visits to 43 different African countries. In sharp contrast, President Trump described African nations, as well as Haiti and El Salvador, as “shithole” countries³⁰ and has not visited sub-Saharan Africa during his two years in office.

Chinese partnerships are not limited to only the provision of telecommunications infrastructure: China has enhanced healthcare, provided educational exchanges, and expanded commercial opportunities for the region. At the Forum on China-Africa Cooperation in September 2018, President Xi announced the alignment of the Belt and Road Initiative with the African Union’s Agenda 2063 and the UN’s Sustainable Development Goals, which demonstrated a commitment to furthering shared interests.³¹

China’s investments in telecommunications infrastructure, as well as other areas in developing markets, have equipped states with the tools to participate in the global economy. A World Bank study showed that a 10% increase in broadband penetration generated a 1.4% increase in GDP in low-income countries. Without China’s provision of internet infrastructure, the economic and social development in the Global South over the past two decades would not have been as great.

Over the past two decades, the U.S. has prioritized other regions as future economic partners and often did not include developing countries. The nature of a telecommunications network is that the greater the entrenchment, the harder it is for a firm to be ousted from a given market, which creates a path dependency. China has positioned itself as the telecommunications provider for the Global South for years to come. The potential long-term commercial, strategic, and political value to be drawn from ownership over the telecommunications infrastructure, and in the case of the U.S. lost, cannot be overstated.

4.What Effect Does China Owning More of the Physical Infrastructure Have?

Today, international communications, global finance, and transportation rely on the internet; the internet in turn depends on its physical infrastructure. Manipulations of the physical network have a ripple effect on all dependent systems. Owning more of the infrastructure that underpins the entire system is a significant advantage for China for the following reasons:

(1) Control Over Other States’ Critical Infrastructure

Submarine cables are critical communications infrastructure that are of vital importance to the global economy and the national security of all states.³² Threats to the physical infrastructure of the internet are not new, and they can be natural occurrences as well as malicious attacks.³³

Disrupting international communications during conflict is common practice. In World War I, the British navy intercepted German communications when they severed all but one of Germany’s underseas telegraphy lines and tapped the remaining cable.³⁴ In recent years, there have been concerns about Russian activity around internet cables, although no concrete evidence has emerged.³⁵ However, it is unlikely that China would disrupt a cable as Russia might, particularly due to the close integration of China’s economy with the global economy. Physical chokepoints can create potential for temporary disruption and influence even in distributed and redundant networks.

(2) Strategic Advantage in Intelligence

Data that flows across foreign-produced equipment and foreign-controlled networks is at higher risk of foreign access and denial of service. China’s ownership of the internet infrastructure increases its access to other states’ information while protecting its own.

In 2013, the Edward Snowden leaks revealed that both the UK and U.S. regularly spy on adversaries by intercepting submarine cables. We can safely assume that other states are carrying out similar intelligence gathering activities on these routes, including China. When China owns more of the networks in markets that the U.S. has not prioritized, China has a stronger hand and possibly greater access to intelligence. It’s not just state secrets that are helpful: information collected on open networks can yield significant insights.

China also gains an advantage by having more networks for its own intelligence to travel that can circumvent likely compromised channels, avoiding non-Chinese-controlled landing stations. The below map shows the new routes laid by Chinese-made equipment that circumvent the Bab-el-Mandeb choke point³⁶ by taking the “long way” geographically via the southern tips of South America and Africa.³⁷

Figure 4: Blue routes are U.S.-manufactured cables, Green routes are China-manufactured

(3) Enhanced Geographical Advantage

China not only has enhanced strategic advantage through access to data, but also through the physical placement of other resources. Djibouti, located in the strategically important Horn of Africa and home to U.S. and French naval bases, has become home to China’s first overseas military base next to the Bab-el-Mandeb Strait, a global shipping choke point where 50% of China’s oil travels.³⁸

Where China lays the physical internet is a clear indication of geostrategic importance and priorities. For example, China has expanded its relations with the Portuguese Azores islands in the Atlantic. The Azores is also home to a U.S. Air Force base³⁹ and has been a critical base during World War II and also as a defense against the Soviet Union.⁴⁰ However, in recent years the U.S. presence and diminished and the Chinese presence has increased. In 2018, Huawei Marine upgraded the Azores submarine cables⁴¹ and announced a jointly funded project with Portugal to develop micro-satellites on the mainland and deploy the satellites on the newly established international launch pad in the Azores.⁴²

Figure 5: A Map of Huawei Marines Cables in the Azores.⁴³

(4) U.S. May Miss Opportunities to Collaborate with the Global South

Developing countries have chosen Chinese telecommunications equipment, and this should matter to the U.S. when considering long-term prosperity and security. Developing countries present significant long-term economic potential, and China has positioned itself to share in their economic development and innovation.

The sale and application of Chinese surveillance equipment is an important issue that should be discussed separately. However, it is worth noting that when China exports other technical equipment to governments in these markets, such as surveillance equipment, it tweaks the products for the intended market. That includes retraining the facial recognition software that is sold to Kenya, Pakistan, and Venezuela on Kenyan, Pakistani, and Venezuelan faces. Even if that data does not leave those markets, the newly trained facial recognition algorithms and models could be taken back to China strengthened due to a higher number of datapoints and more diverse datasets. Access to data is crucial for future economic and strategic advantage, and these benefits have been increasingly routed to China.

5. What Can the U.S. Do?

Over the past two decades, the Global South has not been a priority for the U.S. government. As a result, the U.S. has potentially lost some strategic advantage with the Global South through both telecommunications infrastructure contracts and broader political leverage.

Recommendations:

• Ensure that the USDFC has the resources to support the U.S. private sector’s short-term losses for long-term security gains. Recognize that although the immediate return on investment in the Global South does not make short-term economic sense, in the long-term it will be a good investment. This acceptance needs to be bipartisan and outlive each administration.
• Work with allies. The U.S. cannot compete in telecommunications infrastructure alone due to the basic fact that U.S. companies are not players in all components of the telecommunications infrastructure ecosystem. The U.S. needs to work with allies who have the infrastructure companies and also the strong relationships with governments and business in the Global South that the U.S. lacks.
• Build long term mutually beneficial partnerships with countries in the Global South that extends beyond aid. It is important to recognize the long-term potential in more developing countries and upgrade Washington’s relationship from one focused mainly on financial aid and humanitarian support.
• Make cybersecurity an economic incentive. Support a campaign to enhance the cyber security and broader product quality of infrastructure in the Global South. Make security an economic incentive for all international businesses.
• Proactively find new areas to cooperate with China. It is not strategic or sustainable to treat China as an adversary in every area because the U.S.’ global prosperity and security are intertwined with China’s. Carving out less-sensitive areas to partner in are essential to regain trust on both sides.