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Why Huawei arrest deepens conflict between U.S. and China

Why Huawei arrest deepens conflict between U.S. and China

December 6th, 2018 by Associated Press in National News

WASHINGTON—The dramatic arrest of a Chinese telecommunications executive has driven home why it will be so hard for the Trump administration to resolve its deepening conflict with China.

In the short run, the arrest of Huawei's chief financial officer heightened skepticism about the trade truce that Presidents Donald Trump and Xi Jinping reached last weekend in Buenos Aires, Argentina. On Thursday, U.S. stock markets tumbled on fears that the 90-day cease-fire won't last, before regaining most of their losses by the close of trading.

But the case of an executive for a Chinese company that's been a subject of U.S. national security concerns carries echoes well beyond tariffs or market access. Washington and Beijing are locked in a clash over which of the world's two largest economies will command economic and political dominance for decades to come.

"It's a much broader issue than just a trade dispute," said Amanda DeBusk, chair of the international trade practice at Dechert LLP. "It pulls in: Who is going to be the world leader essentially."

The Huawei executive, Meng Wanzhou, was detained by Canadian authorities in Vancouver as she was changing flights Saturday—the same day that Trump and Xi met at the Group of 20 summit in Argentina and produced a cease-fire in their trade war. The Globe and Mail newspaper, citing law enforcement sources, reported that Meng is suspected of trying to evade U.S. sanctions on Iran. She faces extradition to the United States, and a bail hearing was set for Friday.

The British bank HSBC is cooperating with U.S. authorities in its investigation, people familiar with the matter said Thursday.

Huawei, the world's biggest supplier of network gear used by phone and internet companies, has long been seen as a front for spying by the Chinese military or security services, whose cyber-spies are widely acknowledged as highly skilled. A U.S. National Security Agency cybersecurity adviser, Rob Joyce, last month accused Beijing of violating a 2015 agreement with the U.S. to halt electronic theft of intellectual property.

Other nations are increasingly being forced to choose between Chinese and U.S. suppliers for next-generation "5G" wireless technology. Washington has been pushing other countries not to buy the equipment from Huawei, arguing that the company may be working stealthily for Beijing's spymasters.

Beijing protested Meng's arrest but signaled that it doesn't want to disrupt progress toward settling its trade dispute with the Trump administration. Chinese Commerce Ministry spokesman Gao Feng said China is confident it can reach a deal during the 90 days that Trump agreed to suspend a scheduled increase in U.S. import taxes on $200 billion worth of Chinese products.

U.S. national security adviser John Bolton told NPR that he knew of the pending arrest in advance. He noted that there has been much concern about the suspicion that Chinese firms like Huawei use stolen U.S. intellectual property.

In the view of the United States and many outside analysts, China has embarked on an aggressive drive to overtake America's dominance in technology and global economic leadership. According to analysts, China has deployed predatory tactics, from forcing American and other foreign companies to hand over trade secrets in exchange for access to the Chinese market to engaging in cyber-theft.

Washington also regards Beijing's ambitious long-term development plan, "Made in China 2025," as a scheme to dominate such fields as robotics and electric vehicles by unfairly subsidizing Chinese companies and discriminating against foreign competitors.

In addition to Trump's tariffs, the administration is tightening regulations on high-tech exports to China. It's also making it harder for Chinese firms to invest in U.S. companies or to buy American technology in such cutting-edge areas as robotics, artificial intelligence and virtual reality.

Earlier this year, the United States nearly drove Huawei's biggest Chinese rival, ZTE Corp., out of business for selling equipment to North Korea and Iran in violation of U.S. sanctions. But Trump issued a reprieve, possibly in part because U.S. tech companies are major suppliers of the Chinese giant and would also have been scorched. ZTE got off with paying a $1 billion fine, changing its board and management and agreeing to let American regulators monitor its operations.

The U.S. and Chinese tech industries depend on each other so much for components that "it is very hard to decouple the two without punishing U.S. companies, without shooting ourselves in the foot," said Adam Segal, cyberspace analyst at the Council on Foreign Relations.

Dean Garfield, president of the U.S. Information Technology Industry Council trade group, said innovation by U.S. companies often depends utterly on product development and testing by Chinese partners, not to mention component suppliers.

British Telecom said this week that it would stop using Huawei equipment in its 5G network, the BBC reported, and U.S. lawmakers have lobbied Canada's prime minister to freeze out the Chinese supplier. New Zealand and Australia already have.  Other, less wealthy nations are concerned less about spying and more about low prices, which play to Huawei's advantage.

Both Huawei and ZTE have not only been barred from use by U.S. government agencies and contractors; they have also been mostly locked out of the American market. A 2012 report by the House Intelligence Committee report urged U.S. businesses to avoid their products and called for blocking all mergers or acquisitions involving them.

And nearly a year ago, AT&T pulled out of a deal to sell Huawei smartphones.

"There is ample evidence to suggest that no major Chinese company is independent of the Chinese government and Communist Party—and Huawei, which China's government and military tout as a 'national champion' is no exception," Sens. Mark Warner, D-Va., and Marco Rubio, R-Fla., wrote in October to Canadian Prime Minister Justin Trudeau. They urged him to keep Huawei off Canada's next-generation network.

Priscilla Moriuchi, a former East Asia specialist at National Security Agency now with the cybersecurity firm Recorded Future, said both ZTE and Huawei are wedded to China's military and political leadership.

"The threat from these companies lies in their access to critical internet backbone infrastructure," she said.

"No matter what happens in the short term, (the arrest of Huawei's CFO) is a symptom of a long-term technology clash," said Derek Scissors, a China specialist at the conservative American Enterprise Institute. "We're not going to deal that away in 90 days."

Scissors said he doubts that China will change its tech policies. Beijing must develop innovative technologies to keep its economy growing as its labor force ages and it confronts a huge stockpile of debt. Yet its political and economic system—which promotes inefficient state-owned companies at the expense of nimbler private ones—discourages
innovation.

"I don't see a way out of this," Scissors said.

Likewise, Rod Hunter, an international economic official in President George W. Bush's White House and a partner at law firm Baker McKenzie, said, "I'm skeptical that the Chinese are going to want to say 'uncle.' " U.S. and Chinese officials are "trying to tackle a problem that is going to take years, maybe a decade, to resolve."

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