US-China trade relations: the Huawei Arrest

Tensions in US China relations were taken to an entirely new level last Thursday with the news that Meng Wanzhou, the chief financial officer and deputy chairman of Huawei, as well as the daughter of the firm's founder, was arrested in Vancouver at the request of the US authorities.

Appearing in front of a Canadian court at the weekend, Ms Meng was charged in relation to a US investigation into a possible violation of sanctions against Iran, with the threat of deportation.

Ms Meng was not well known in China before this incident; her stature cannot be compared with that of Silicon Valley giants like Tim Cook or Bill Gates, whatever some Western media sources might suggest. Even so, Beijing will almost certainly view the arrest as politically motivated and part of a White House strategy to ratchet up pressure on Beijing to make trade concessions, argues Ambassador Gardner, whether intended as such or not. Beijing may well respond in kind at a time and place of its choosing – initial action has included summoning the US and Canadian Ambassadors into the Chinese Ministry of Foreign Affairs. Arguments from Washington that the US judiciary is independent will be viewed with significant skepticism, including Friday’s statement from John Bolton, US National Security Adviser, that he and President Trump were unaware of the arrest when meeting President Xi Jinping in Buenos Aires on 2 December.

It was at this meeting, only a few days before the news broke of the Huawei arrest, that President Trump and President Xi held two and a half hours of talks over dinner at the G20 and agreed to pause their incipient trade war. The US announced it would introduce a 90-day moratorium on the next tranche of tariffs on Chinese goods, previously due to be imposed on 1 January, to allow more time for a bilateral trade deal to be concluded; the planned 25% levy on $200 bn of imports will kick in if no deal is done by the three-month deadline. In return, said the White House, Beijing committed to increase imports of US goods from a range of sectors and lower tariffs on US vehicles. Major markets which had been primed pre-summit for some good news on US-China trade responded appropriately on 3 December, with most indices up 2% or more; however, these gains were wiped out the next day when Trump reminded the world via Twitter that he is a ‘tariff man’ and have been wiped out further since.

The jury is still out on whether the Buenos Aires talks mean a deal is near. No joint statement on the talks has emerged. The initial US and Chinese statements on the talks read like summaries of two entirely different meetings, with the Chinese version making no mention of vehicle tariff reductions, or specifics on which imports would be increased. A Chinese Commerce Ministry official did acknowledge the 90-day deadline on Wednesday at least. While this initially allowed both sides to declare victory, the absence of specifics also makes it easy for each to accuse the other of backsliding three months down the line. It also makes confusion over what has been agreed that much more likely – a real problem, given that the Chinese are unlikely to engage on many of the market-access and investment barrier issues on the table. At least on this occasion the two principals were talking face to face, improving the chances of effective communication. Even so, there are valid questions about whether President Trump’s apparent positivity reflected deeper policy or a desire to buoy the markets. This agreement feels more like a ceasefire than disarmament. As Pascal Lamy points out, it still leaves everything open.

Ambassador Robert Zoellick argues that, fundamentally, China doesn't want a conflict, but that it cannot be seen to be yielding to President Trump's pressure and the arrest of Ms. Meng, as Lord Powell points out, “arouses sufficient popular hostility in China to further constrain President Xi’s ability to display flexibility.” Lamy argues that China has a choice: either address systemic reforms (mainly subsidization of state-owned enterprises) and keep the WTO – ‘the insurance company against protectionism’ – alive through substantive changes; or procrastinate, allowing the US to ‘turn the tariff screw’ with the ‘rest of the world tacitly agreeing.’ Given that China is, he argues, in the midst of a debate whether to push for more reform, and that it is unclear where Xi stands on the issue, it is unclear what choice it will make. Zoellick believes that China may still come up with a package of purchases, some tariff cuts, and other policy changes that Xi will say are part of China's commitment to reform. It will then test whether President Trump is in the mood (like above when he declared he was a ‘tariff man’) to declare success. That no one knows, and President Trump's advisers are very divided. Peter Navarro (the President’s Director of Trade and Industrial Policy) wants conflict. Robert Lighthizer (the US Trade Representative) wants frictions to decouple the economies, whilst Steve Mnuchin (Secretary of the Treasury) and Larry Kudlow (Director of the National Economic Council) want a settlement, but any signs of softness may risk an attack from any pro-conflict supporters. As Ambassador Zoellick says, only President Trump can declare a deal – and he acts out of instinct, a read of the political pros/cons, and the day to day conditions.

Crucially, by the time the 90-day ceasefire is up the political landscape in Washington will have shifted. The US House of Representatives will be under Democrat control and flexing its muscles; the Republican hold on the Senate will be both stronger than before, and more pro-Trump; and the White House will find that its policy-making time is more constrained as the president's legal troubles mount. Trump's trade agenda is perhaps the one component of his policy platform on which he has considerable Democrat support, while Republican opposition to his approach has been weakened by Trump's increasing hold over the party. At the same time, there is an emerging consensus in sections of the US policymaking community that the wider strategic challenge Beijing presents to US dominance must be confronted imminently for fear that edge will be lost for good. Trade is increasingly seen as a key part of that Chinese challenge – a part that uses illicit means (intellectual property theft, state support, industrial espionage, etc) to take advantage of the US. In this context it is easy to see a White House keen to beat a national rather than partisan drum choosing to securitize the US-China trade dispute by tying Chinese compliance to other issues. And if these are issues on which Xi cannot give ground for fear of undermining his authority – such as the 'Made in China 2025' plan, or coercion of North Korea, or assertiveness in the South China Sea – then a trade deal will become nearly impossible.

Of course, on Huawei, it is difficult to separate this story of increasing trade tensions from that of perceived espionage. The company has been publicly under pressure for a number of weeks from a variety of nations (particularly the ‘Five Eyes’ intelligence-sharing alliance of the US, UK, Canada, Australia and New Zealand) to provide more clarity on its operations – or be prepared to be blocked from tenders. Although Huawei was not directly referenced, recent speeches from the heads of the US and UK Secret Services warning of the blur between company and nation in China, have been perceived as a nod to the firm. It appears the pressure is perhaps working as on Friday morning the Financial Times reported that the company had agreed to increased scrutiny from GCHQ, the UK’s SIGINT arm – though for reasons unrelated to this latest spat. Clearly US-China trade issues could well get even more complicated before they are resolved.

Things to Watch For: 

  • Bans on travel to China by staff of major Western firms. These will indicate that they have received strong signals that retaliation against Western executives is likely.

  • Whether Liu He, Vice Premier and key architect of Beijing’s economic policy, arrives in Washington DC this week at the head of a Chinese delegation to begin trade discussions – as reports before Ms Meng’s arrest suggested he would. If he does, that is a positive sign that the arrest has not derailed the full process.

  • Xi Jinping’s speech later this month to mark 40 years of reform – it will be an important “state of the nation” speech focused on how to carry out further reform, though It may not offer any specific message to the White House.

  • Conversely, any consistent White House re-framing of the China trade dispute, particularly by President Trump himself, in security or strategic competition terms – a sure sign that the administration has no intention of averting a trade war. President Trump’s Twitter silence on the arrest raises more questions.

  • Intensified US scrutiny of Iranian dealings of 3rd country companies. The US Treasury is undoubtedly looking for high-profile 3rd country sanctions busters to prosecute; indeed, Ms Meng may have fallen foul of this strand of US government policy, rather than the US-China trade dispute. In any case, unilateral imposition of sanctions on Iran will have a greater impact if Washington acts as a self-appointed “world’s policeman” on this matter.

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