Late yesterday, the Journal reported on comments made by US Attorney General Barr to the affect that the US government should construct a telecom equipment vendor that could compete with Chinese equipment major Huawei.

Put simply, this is a terrible idea.

The United States has built an incredible economy without ever involving government directly in this level of economic planning. Why should this country abandon the principles of free market capitalism that have driven its immense wealth?

We have worked in and around the telecom industry for a long time, and below we list the many reasons why this project will ultimately fail, and likely do a lot of harm in the process.

Our first impression of this proposal is that it is so ludicrous as to not merit a response. Better to ignore it because it is likely not a real effort. Last year, there were rumors of similar government intervention in the wireless industry. Those sank beneath the waves of political fever without a ripple, and it seems likely that this will as well. But this one stuck with us, and here we are. This is not intended as a partisan piece, both major US political parties have their share of political lunacy right now. We are clearly in election year Silly Season. But we do not know healthcare, taxation or energy, so we are going to write about this one, about which we do know a thing or two.

So why is this a bad idea?

First, there is no “Race to 5G”. That is an empty political phrase that anyone who follows wireless reads as a non sequitur. 5G is just one more flavor of wireless standards. It provides modest consumer benefit and some really obscure cost savings to wireless operators. But if we just stuck with 4G for another ten years and skipped right to 6G, it would be hard to tell the difference. No one is racing to 5G because it involves hundreds of billions of capex. The telecom operators are going to deliver 5G at their own pace, a pace which will not be mistaken for a race or even a hurry.

Second, the government has long been demonizing Huawei as an agent of China’s military and intelligence complex. The US government has every right to protect its national interests, but painting Huawei in this light obscures the real reasons behind Huawei’s success. Huawei is leading global market share for 5G equipment because its products are ready. Last time we checked, Nokia and Ericsson were about a year behind Huawei in readiness for 5G. This gives lie to the myth that Huawei only succeeds by copying others. How could they copy everyone else but still be ahead?

Another reason for Huawei’s success is that they have received immense financial backing from the Chinese government. The Journal published an incredible story about this on Christmas Day last year, pinning state support at $75 billion including tax breaks, cheap land deals and subsided bank loans. As much as we think about telecom equipment vendors as “Technology Companies”, they are really financial engines providing financing for operators.

So there is little doubt that Huawei has an advantage here, but how should the US government respond to this? AG Barr hinted at some form of government funding of a purchase of Nokia or Ericsson. This seemed to include an anti-trust waiver for a US company to acquire the European companies. He also suggested a private equity buyout of these companies. These are empty proposals. An anti-trust waiver from the US or any hint of preference for an acquisition of Ericsson or Nokia would prompt a never-ending anti-trust review by China. Either company could give up its operations in China to skirt this, but this would destroy so much value as to render the acquisition non-commercial from the get-go.

And this is where we really get into trouble. This would be explicit State-sponsored industrial policy. The US has shunned this for almost its entire history. Does anyone in the US really want the government making these kinds of decisions? Why would it stop at telecom? Would energy and agriculture be next?

We invite anyone who thinks a US government backed acquisition of  Ericsson is a good idea to spend an hour with us in the DMV or the Social Security office.

Aside from the philosophical there is another major problem with this approach – it will stifle innovation. Selling technology to telecom operators is already hard enough, but layer in government bureaucracy and the whole process grinds to a halt. Anyone who thinks the government is good at fostering new technologies should revisit the ACA website roll-out. (See, we said this would be nonpartisan.)

The great irony is that 5G has the potential to blow open the equipment industry. A big part of the standard is the re-architecting of the operators’ software stack. This decouples the hardware (base stations and routers) from the software (billing, management, etc.) that runs on top of it. This offers a major shift in industry economics. It also plays to the US’s advantages. While the US does not have any pure play wireless equipment vendors left, it does software better than the rest of the world combined.

Yet the Attorney General specifically ruled out this approach, belittling the time it would take for the ‘open software’ model as “Pie in the sky”.

He also proposed freeing up more spectrum for 5G, and this is where the whole thesis falls apart. More spectrum does nothing to address the equipment industry. It is a trivial effort for Huawei, or any of the others, to repurpose gear to new frequency bands.

The big problem with this approach is that it smacks of favoritism. Spectrum is a common good, which the government licenses to companies, often on at favorable terms. Freeing up more spectrum will only benefit a small number of operators in the US. Notably, Barr called on the FCC to resolve the impasse over L-Band. We will spare you the whole L Band saga, but suffice it to say this benefits a single company, and that is neither Nokia nor Ericsson.

The problem with state-sponsored industrial policy is that it picks winners in a political process, not a commercial one. It is too easy for that to slip into cronyism. We are not accusing the Attorney General of that level of conduct. We merely point out that opening this door will inevitably lead to a world in which misdeeds will occur under any political party. Anyone in government promoting this idea today should ask themselves how they would feel about Bernie Sanders picking commercial winners and losers. It is hard to look at these proposals, and recent regulatory developments, and not come away with a suspicion that there are ulterior motives and hidden actors behind it.

Instead of this heavy-handed government approach there are a host of smaller, but more potent policy changes that could both protect the US and retain the competitiveness of US industry. These range from expediting auction processes and spectrum clearing, to the acceleration of that decoupling of software and hardware. Encourage the telecom operators to open their networks to new vendors. Revisit government policy on the World Trade Organization. Despite the WTO’s faults, a rigorous public review of Huawei’s trade practices and history could be a very powerful tool.

Pursuing explicit industrial policy will mean competing on China’s terms. China has a radically different base for its economy, and there is no reason to think that model is superior or could ever work here. US companies are not suited to competing under heavy government involvement. Many, us included, would argue that gives the US a major advantage. There is no reason to play by China’s rules.