*** The Tech Revolution Comes Of Age

29 March 2016

-- this post authored by Matthew Bey

Technological revolutions frame historical eras. Each cycle thrusts new sectors into prominence, turning companies into strategic assets for their governments to exploit. Whether it is European trading companies in the colonial era or international oil companies in the 20th century, technological revolutions give corporations such power and importance that they become inherently geopolitical.

The information technology revolution is no different. Computer software and hardware technologies have become indispensable to the modern economy, underpinning the economies of the developed world. The companies that operate in this space, such as Samsung, Apple, Google, Facebook and Baidu, are among the most powerful in the world today. At the same time, they often find themselves at the center of geopolitical disputes.

Though 30 years in the making, the IT revolution remains in its infancy. The balance of power between tech companies and governments has not yet been fully defined. Likewise, the extent to which countries such as China - countries where, by Western standards, state institutions work too closely with the business elite - will benefit from this revolution, and whether they will be able to wrest control of it away from entrenched Western powers, remains to be seen.

From Trading to Transportation

Over the past 500 years, two revolutions have defined the way the world's powers interact. The first was the development of deep-water navigation in the 15th and 16th centuries, which marked the start of five centuries of European global domination. European trading companies such as the Dutch East India Co. and British East India Co. soon became de facto arms of their governments, implementing foreign policy goals throughout their colonies and even administering them politically at times.

The second, the Industrial Revolution, was equally transformative, redefining the roles of global empires. Though many raw materials were needed to fuel this economic revolution, energy - for both electricity and transportation - became the most politicized and technologically difficult to access. The electric and transportation industries quickly gained political power, and by the early 1900s, oil became the fuel source of choice for transportation.

Oil companies, in turn, quickly became instruments for accomplishing their governments' geopolitical objectives. For example, for more than 60 years, the United Kingdom's Anglo-Persian Oil Co., which developed the Iranian petroleum industry, influenced British policy toward Tehran. Not only did the company profit London financially, but it also sold oil to the Royal Navy below market value and helped to reinforce Iran's alliance with the West in the first half of the Cold War. When Iran nationalized its petroleum industry in 1951, London even helped orchestrate a coup d'etat to regain control.

Today, the relationship between governments and oil companies is far more nuanced. In the wake of the Cold War, the West is more reluctant or less able politically to back revolutions and coups d'etat to protect its energy interests. Modern Western international oil companies, even those whose governments hold sizable stakes in them, are largely independent actors that lack the kind of monopoly on government sales that, for example, the Anglo-Persian Oil Co. had. International oil companies retain their political sway in negotiating with countries, however, thanks to their formidable financial and technological resources. Even now, Iran - despite its backlash against Western oil companies and Supreme Leader Ayatollah Ali Khamenei's anti-Western rhetoric - is salivating at the prospect of U.S. and European oil companies returning to invest.

The digital revolution, beginning in the second half of the 20th century, is now having similar effects on the global system. The Internet has redefined the modern economy, enabling the growth of software, global supply chains and modernized manufacturing processes. And the revolution is far from finished. Emerging technologies such as smart grids, additive manufacturing, artificial intelligence and intelligent industrial robots are all poised to make a significant impact in the coming decades.

A New Transformation, a Different World

But this transformation is occurring in a world fundamentally different from that of previous revolutions. Worldwide, the United States sits at the heart of financial institutions, controls the oceans and undisputedly leads in technology development. At the same time, Europe's economy has been surpassed by China's and India's for the first time since the Industrial Revolution began. Not since before it perfected deep-water navigation has Europe lacked the wealth and the political control of Asia.

With the possible exception of Germany, Europe's former industrial powers have all been noticeably absent from the latest revolution. Meanwhile, South Korea, Taiwan, Japan and the United States have been the main contributors to software and hardware development. For that reason, these countries' companies dominate thetechnology landscape: Microsoft, Apple, Google and Facebook are all U.S. companies, Samsung is South Korean, and Foxconn and TSMC are Taiwanese. China has seen tremendous growth in these areas as companies such as Baidu, Xiaomi, Lenovo and Huawei follow in the footsteps of their Korean, Japanese and Taiwanese counterparts.

As the tech revolution continues, the relationship between tech companies and their governments is still being defined. Although governments retain considerable control over regulation, companies' mastery of technology gives them a great deal of negotiating power. Figuring out how to regulate, control and monitor the Internet and eventually leverage the sector to fulfill its geopolitical imperatives now tops the list of nearly every country's objectives.

In the West, individual privacy has become a key issue that will remain indefinitely. People often balk at the thought that Google, Facebook and other companies maintain databases of information culled from their search histories, communications, purchases and GPS locations. But these companies rely on such information to develop and perfect their services, whether by customizing online advertisements and searches or updating real-time traffic information.

Of course, regulations on Internet privacy are ambiguous, as Google has now found out with French officials. In March, France slapped a fine on the U.S. company for failing to enforce the European Union's "right to be forgotten" policy on all Google searches, not just those in France. For the United States and Europe, striking a balance between security and privacy - digitally and otherwise - has been an ongoing struggle. Privacy Shield, the new trans-Atlantic data transfer agreement between the United States and the Europe Union, will ensure that U.S. companies do not need to store private information locally in Europe, at least for now. Should the agreement fail, however - for example, through renewed disputes between the United States and the European Union or further fragmentation within the Continental bloc - the issue of control over private information would resurface.

Beyond just the United States and Europe, other countries are moving to gain control over the tech sector, the Internet and the information flowing through both. Because most of China's tech sector depends on foreign technology, its efforts to regulate the tech sector and the Internet are limited. When it drafted its terrorism and cyber-security laws, Beijing pushed for a backdoor to circumvent encryption. Foreign companies, most notably Apple, opposed a backdoor solution, and China ultimately had to drop the issue.

It was for this reason that the world was so concerned about how Apple's fight with the FBI would turn out. Had the U.S. government forced Apple to unlock Syed Farook's cellphone, it would have set a precedent other countries could cite as they sought to implement their own backdoor measures. But now the FBI claims to have unlocked the phone without Apple's help. If that is true, countries such as China will probably have to revisit their backdoor policies until they lower their dependence on foreign tech companies.

Future Competition

Although today the tech world revolves around the United States, China has the most Internet users - more than the next two countries combined - and its overall economy will soon overtake that of the United States. Should China successfully close the gap between its companies and their foreign competitors, it will be the one country that could dethrone the United States as the pre-eminent global tech power.

Beijing will not attain this goal easily, if at all. Despite China's rising importance in the tech sector, even Chinese powerhouses such as Xiaomi primarily use foreign-engineered components. But in the tech world, as in almost every facet of the current global economic system, Beijing is trying to bring the dominance of Western institutions to an end. Thus, the continued prominence of the United States and its allies in the tech sector poses just as much of a hindrance to China's ambitions as the strength of the International Monetary Fund, the World Bank and the U.S. dollar does in the global financial system.

Though China might one day overcome its technological dependence on other countries, the developing world is unlikely to supplant U.S. or other Asian tech companies for decades, if ever. Mass media and connectivity will continue to spread the cultures that dominate the tech sphere throughout the world, much in the way trading companies did. And as Chinese companies expand their presence in regional markets over time, China will seize the opportunity for virtual colonization as well.

Becoming Supranational

Giant tech conglomerates are now finding that tech innovation and computer science applications can revolutionize industries beyond their own. As a result, many of today's tech companies are integrating themselves in almost every emerging technology. For example, Google, which already has business operations spanning web services, advertising, entertainment, media, operating systems and imagery, is moving into the automotive sector via autonomous vehicles, the leading edge of artificial intelligence, robotics, defense and advanced computing techniques. The breadth of sectors in which Google, Baidu and Samsung are getting involved is perhaps more varied than those that trading companies used, especially since these sectors provide the foundation for future revolutions in manufacturing.

Moreover, the sheer amount of data that these companies possess - not to mention their ability to process the data - is unmatched by Moscow, Beijing or Washington. This enables them to use their data in innovative and unique ways, perhaps the most powerful of which are still unimaginable today. Even now Baidu claims to be developing software to help predict crowd problems. If effective, this would prove an invaluable tool to Beijing, which could use it to predict and prevent mass protests on the scale of those in Tiananmen Square in 1989.

But the IT revolution is now just 30 years in the making. Its impact on the world's economy may not yet be fully realized, and its most profound developments may be yet to come. To put the revolution into perspective, 30 years after Vasco da Gama first visited India, the world's most dominant trading companies, such as the British East India Co., were 70 years from even forming. Standard Oil was not formed until nearly a century after the Industrial Revolution began.

The world is just beginning to adjust to the newfound realities that the tech revolution has introduced. Consequently, countries are just beginning to adapt them to their overall geopolitical imperatives. For now, most states remain in reactive mode, trying to adjust their policies on the fly to accommodate changing realities. They will likely struggle to exert the same amount of control over the tech industry that they had over oil and trading companies. If advances in technology continue to outpace regulatory measures, the United States, China and Europe may find themselves on equal footing with regard to their control over the tech world. And as the balance of power between governments and corporations shifts, companies such as Google or Facebook could evolve into independent supranational actors with little state control and huge geopolitical power nonetheless.

"The Tech Revolution Comes of Age" is republished with permission of Stratfor.