US strikes at heart of ‘Made in China’ with Huawei arrest

BEIJING/WASHINGTON — Dec 7, 2018. The arrest in Canada of Meng Wanzhou, chief financial officer of Chinese telecommunications equipment maker Huawei Technologies, on the very day that the presidents of the U.S. and China dined together augurs rough seas ahead for the Sino-American trade talks.

The arrest disrupts the conciliatory mood thought to have been created last week at the dinner between U.S. President Donald Trump and Chinese President Xi Jinping. High-tech has immediately been thrust to the forefront of the 90-day trade negotiations.

Reuters reported that Meng was arrested as part of a U.S. investigation of an alleged scheme to use the global banking system to evade U.S. sanctions against Iran.

A monitor assigned to HSBC Holdings Plc told federal prosecutors about suspicious transactions linking Huawei Technologies Co. with Iran, adding evidence to a U.S. investigation that led to the arrest of the Chinese company’s finance chief, according to a person familiar with the matter.

For Beijing, the development serves as an unpleasant reminder of the U.S. sanctions activated against ZTE in April. The Chinese telecommunications equipment maker was in effect barred from doing business with American suppliers, blocking its access to chips and other vital components and sending it to the brink of bankruptcy. The situation was resolved in July only after a direct phone call between Xi and Trump — and a hefty fine, $1 billion.

The agreement also requires ZTE to allow U.S. enforcement officers inside the Chinese company to monitor its actions. In return, ZTE can resume buying components from U.S. suppliers that it needs to make smartphones and build telecoms networks.

ZTE was required to change its management and its board, and put $400 million in escrow, which it will forfeit if it violates the agreement. In mid-April 2018, the U.S. banned exports to ZTE as punishment for the Chinese company breaking the terms of a settlement to resolve its sanctions-busting sales to North Korea and Iran. “We still retain the power to shut them down again,” Commerce Secretary Ross said.

The consequences of a similar ban on Huawei could prove much more severe. The company is China’s largest private enterprise by revenue, with five times ZTE’s sales, and the biggest mainland-based exporter.

Huawei has a key role to play in the “Made in China 2025” industrial modernization initiative, which U.S. Trade Representative Robert Lighthizer — Washington’s point man on trade talks — seeks to scrap as the two countries vie for technological superiority.

The company is central to Chinese efforts to implement fifth-generation wireless service. 5G will be vital to such emerging fields as artificial intelligence and autonomous driving technology, and Washington sees Beijing’s plans for the technology as a threat, given the potential military applications.

A bipartisan U.S. congressional advisory committee warned last month that if China takes a leading role in setting international wireless standards, Beijing will be able to collect American data much more easily. Letting Huawei’s rise continue would strengthen China’s military strategy and open the door to cyberattacks, it said.

The White House and Congress have taken steps to block five Chinese high-tech companies from supplying communications equipment and surveillance cameras to U.S. government entities.

The Fiscal 2019 National Defense Authorization Act which passed both houses of Congress with strong bipartisan support this summer, tightens the squeeze on not only Huawei and ZTE, but also Chinese surveillance product sellers Hangzhou Hikvision Digital Technology, Dahua Technology and Hytera Communications.

The legislation will ban U.S. government entities — the federal government, the military, independent administrative organizations and government-owned businesses — from procuring products from the five companies, including servers, personal computers and smartphones, or products containing components made by these companies, even if the finished products are manufactured by others.

Communications equipment made by companies other than the five but owned by or related to the Chinese government will also be banned. The names of the companies have yet to be announced.

Washington will take a second — and stricter — step, forbidding companies around the world from doing business with U.S. government agencies if they use products from the five companies in their offices. This policy will start on Aug. 13, 2020, and apply regardless of whether the products and services are linked to the equipment.

The arrest “represents a new and major escalation in what has been a series of U.S. efforts to hold Chinese companies accountable for violations of U.S. law,” said analysts at Eurasia Group, a political risk consultancy. The incident would “affect the atmosphere around the negotiations — making them less likely to bring a sustainable settlement,” they noted.


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