Quick Take: Huawei Under Pressure: Implications for Chinese Tech

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The developments around the high-profile arrest of Huawei’s CFO has created a media frenzy, launched a range of conspiracy theories and increased speculation about the role of Chinese telecom equipment providers globally. The following is a succinct summary of the salient facts of the case and its potential implications.

Huawei CFO Detained in Canada

Huawei CFO Meng (Sabrina) Wanzhou, daughter of Huawei Founder Ren Zhengfei, was arrested on December 1 by Canadian authorities for allegedly defrauding multiple financial institutions by denying a connection between Huawei and a subsidiary, Skycom. Skycom is believed to have evaded sanctions on Iran by selling banned equipment between 2009-2014. The United States has requested the extradition for Ms. Meng to appear in federal court in New York’s Eastern District.

The arrest comes after the U.S. Justice Department launched a criminal probe in April into Huawei’s potential violation of the Iran sanctions. At the start of the investigation, Reuters reported that it was being run out of the U.S. attorney’s office in Brooklyn, New York.

A spokesperson for Huawei said that the company complies with laws and regulations everywhere it operates, and that Huawei “is not aware of any wrongdoing by Ms. Meng.” The Chinese government has also stated that they believe that Huawei has not violated any laws.

The United States government was informed in advance that Canada was planning this action. It is perhaps not a coincidence that the arrest took place on the same day that Presidents Trump and Xi were meeting in Argentina on the margins of the G20 meeting, and reached a framework deal on resolving the trade crisis.

The action follows sanctions imposed in April 2018 by the U.S. government on Huawei’s competitor, ZTE, for similar infractions. As part of the trade negotiations with the United States, President Trump agreed to a compromise in the imposition of these sanctions that would allow ZTE to continue to operate. It remains to be seen if the Administration will be willing – or able – to commit to a similar arrangement with Huawei, but it is highly unlikely given that this case is moving through the judicial system – and given Huawei’s reputational challenges within the U.S. government.

Background

The allegations revolve around the connection of Meng—and Huawei—to Hong Kong-based company Skycom Tech. In 2013, Reuters reported that in 2010 Skycom attempted to sell Hewlett-Packard gear to Iran’s largest mobile phone operator, violating U.S. laws that prohibit the sale of such U.S.-origin products to Iran. The incident came back to Huawei because of connections discovered between Skycom, Huawei, and Meng, namely:

·Pages of the sale proposal were marked “Huawei confidential” and bore Huawei’s logo
·Meng became a director at Skycom in February 2008 and resigned in April 2009
·A management firm owned by Huawei’s parent company held 100% of Skycom’s shares in 2007; Meng was company secretary of the management firm at the time
·Employees at Skycom referred to working for “Huawei-Skycom”
·Ultimately, Huawei said that the equipment was never sent to Iran.

Huawei and the International Community

In recent months, several Western governments – and Japan – have voiced opposition to the use of Huawei equipment. According to information from the British Broadcasting Corporation:


·In November, New Zealand barred Huawei from supplying a local mobile network with 5G equipment
·The U.S. and Australia had already closed the door on Huawei's involvement in their next-generation mobile networks
·Canada is carrying out a security review of Huawei's products
·The United Kingdom’s service provider BT is removing the Huawei kit from the core of its 5G network
·The United Kingdom’s head of MI6 publicly voiced concerns about the use of Huawei equipment in the United Kingdom
·On December 7, the EU's technology commissioner Andrus Ansip said countries "have to be worried" about Chinese manufacturers
·Japan announced it would halt buying Huawei (and ZTE) equipment
·But the interior ministry of Germany says it opposes banning any suppliers from its 5G networks

Recently, U.S. officials have been briefing foreign allies on the cybersecurity risks they perceive Huawei to pose, aiming to persuade telecom regulators and industry executives to avoid using Huawei equipment. It is clear that the effort by the United States government is having an impact on Huawei’s sales internationally – and potentially that of other technology companies.

What It Means  

This story highlights the centrality of innovative and influential technology to the current tensions in the U.S.-China relationship. Although the headline is the violation of sanctions on sales to Iran, the deeper issue is China’s role in shaping the global digital landscape. With the coming transition to 5G technology—with many more devices connected to the internet—there is concern in Washington about Huawei indirectly granting Beijing a great deal of influence in this new landscape.

There are two parts to this concern. First, it is a competitive and commercial challenge to the United States; and second are the national security implications of using-Chinese made telecom equipment as part of the American network.

Our concern is that this event could be the tipping point in what former Treasury Secretary Hank Paulson calls the rise of an “economic iron curtain.” As technology becomes more sophisticated and China vies with the United States for technological dominance, countries will be forced to choose between the two systems. For example, if a region uses IBM and Apple, it will not be permitted to interconnect with Huawei or Xiaomi, and vice versa. In a sense, it would create a balkanization of the technological world – and the internet.

This case will further inflame those on Capitol Hill, such as Senator Marco Rubio, who are calling for tough action across the board to counter Chinese influence in the United States.

Also, the U.S. business community has been quick to react. In a sign of the rising tensions, several U.S. tech companies, including Cisco, have restricted travel by their executives to China for fear that the Chinese government will retaliate by arresting one of their staff.

The Impact on U.S.-China Trade Talks

It remains to be seen if this case will have an impact on the U.S.-China trade agreement. The significant nationalistic reaction on social media could factor into China’s stance. Yet, by several accounts, the two sides have worked out the basic framework of an agreement and are now finalizing the details. But there is no question that it is easier to reach consensus in a more positive atmosphere rather than one where the basic issues around the core of the trade case – dominance in technology and its national security implications – are under dispute.

By

Basilinna

|

December 10, 2018

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