Huawei and US-China trade

US prosecutors’ indictment of employees of Chinese technology giant Huawei – including its founder, Ren Zhengfei – on 28 January has heightened the controversy surrounding the firm and appears to complicate efforts to end the trade war between Washington and Beijing.

Ren and his staff are accused of lying to the FBI, business partners and banks in an attempt to conceal sanctions-busting activities in Iran and the use of coercion and a company-wide incentive scheme to steal competitors’ secrets. Separately, Ren’s daughter, Huawei CFO Meng Wanzhou, remains on bail in Canada awaiting a decision on whether she should be extradited to the US on related charges of breaking Iran sanctions. The latest charges came two days before senior American and Chinese negotiators were due to resume efforts to end their trade war. US Treasury Secretary Steven Mnuchin has made it clear there is no link between the issues, but Beijing does not seem convinced. It accused Washington of using ‘its state power to smear and crack down on targeted Chinese companies in an attempt to kill their normal and legal business operations’; ‘strong political motives and manipulation’ lay behind the indictment, it claimed. 

Huawei has long provoked concern in the US, particularly in the intelligence community, for the ubiquity of its technology and the access that theoretically provides to critical infrastructure. This concern has been exacerbated by the firm’s pioneering role in 5G mobile phone technology and shifts in China towards greater state influence over private businesses. Key US intelligence allies Canada, Australia and New Zealand – with the UK and US, part of the ‘Five Eyes’ intelligence-sharing agreement – have followed the US’s lead in trying to exclude the firm from sensitive applications. The UK has so far been more reticent to follow suit, having dealt successfully with the firm since 2005. It set up a center to evaluate Huawei equipment and activities partly staffed by personnel from the signals intelligence agency GCHQ. The British authorities also appear to be relatively satisfied both with the steps taken to mitigate the potential risks from having a Chinese supplier in their telecoms infrastructure – Huawei has been excluded as a vendor for 5G core technology, for instance – as well as Huawei’s readiness to make technical changes sought by the intelligence services. The US indictments may however increase political pressure on the UK to do more. They will certainly increase political pressure in the US for fragmentation in the 5G market, to avoid the putative security risks posed by having a provider like Huawei with access to the hub of a single new national critical infrastructure. Indeed, suspicion of Huawei may cause fragmentation in a range of global internet- and data-related markets, reinforcing emerging trends towards regional integration rather than the globalized world widely envisaged a decade ago.  

The Huawei case will have wider business ripples too. China’s unitary system, in which the courts are under party control and serve it rather than an abstract notion of justice, makes it extremely difficult for Beijing to accept that other countries’ judiciaries might operate independently of government. It thus sees the detention of Meng Wanzhou as an essentially political act by a state seeking to curry favor with Washington, rather than the legal obligation of an independent judicial system. The apparently retaliatory detention of Canadian business executives in China has already caused unease in C-suites in North America and Europe, which in the long term will hurt Beijing. Chinese businesses, on the other hand, are likely to be much less interested in the US, where fears of what they may see as a political judiciary will be compounded by the huge civil liabilities likely to accompany criminal prosecution.

The charges involving alleged efforts to steal competitors’ proprietary technology echo one of the key grievances of US trade negotiators, that the playing field is uneven due to Chinese firms’ industrial espionage. It is possible that the proximity of a 1 March deadline for an agreement – to avert the US increasing tariffs on $200 billion worth of Chinese goods to 25%, from 10% – concentrated negotiators’ minds. In the immediate term, although the charges had the potential to jeopardize US-China trade talks, statements from the White House on Thursday evening suggest they have not been derailed.

Whether the talks have produced lasting results is another matter. The US’ key negotiator, Trade Representative Robert Lighthizer, has demanded much more than China has offered, while the structural issues on which he is particularly focused do not lend themselves to being addressed in a single deal. Conversely, Beijing cannot appear to have been browbeaten into an agreement – a charge that Lighthizer’s negotiating style may well engender. A Chinese commitment to import 5m tons of soybeans is a step but will not satisfy the underlying US demands.

Yet there are undoubted political imperatives for a deal on both sides. President Trump’s current difficulties in securing funding for one of his key election promises (a border wall) might well make him even more keen on success on another (being ‘tough on China’), particularly as there are indications that his tariff policy is losing ground in mid-western states he won in 2016. He is also known to measure success or failure by stock market performance, with the bounce that would result from an end to the trade war being seen as an undoubted triumph. China, on the other hand, is suffering a larger than expected economic slowdown – something that further tariffs would undoubtedly accelerate. Much will depend on whether Trump will accept the kind of terms China is currently willing to offer or insist on the more maximalist position currently pursued by Lighthizer. This is likely to be determined by any number of factors, such as how the Chinese react to Lighthizer's demands, how tough Trump has to be on China for his core support to believe he has won, and what might be the dominant political narratives at the telling moment.

Given that 1 March is a month away, it is probably unrealistic to think of a permanent deal at all. Although talk of a Trump-Xi meeting increases the likelihood of some form of "deal," especially if China adds terms that enable Trump to look like the ultimate dealmaker, any "deal" is more likely to resemble a tentative truce. A ceasefire with benefits. This might involve major purchasing commitments by Beijing; various Chinese market access and investment changes (which China will say are in its interest, in part to save face); a framework for addressing structural issues, such as intellectual property rights, forced technology transfers, state subsidies, and the Made in China 2025 technological dominance strategy; and retaining the current tariffs, with the possibility of further increases should various reviews fail to show significant changes in Chinese behavior. Of course, the discussion to date has been a bilateral one between China and the US, and many other nations, currently watching from the side-lines, will be considering agreements for their industries and technologies. Against the backdrop of this kind of deal making, Huawei’s difficulties can seem very minor indeed.

This piece was written with contributions from Brunswick’s Geopolitical Principals – Bob Zoellick, former President of the World Bank, Pascal Lamy, former Director General of the World Trade Organization, George Yeo, former Singapore Cabinet Minister, and Lord Charles Powell, former adviser of British Prime Ministers Thatcher and Major.