U.S. legal action against Huawei executive could backfire in unexpected ways

Reporting from Beijing —  The arrest in Canada this month of a member of China’s corporate elite may shake Sino-U.S. relations for years, but may also push China to take steps to quicken its rise as a global tech leader.

The arrest of Meng Wanzhou, vice chairwoman of Chinese smartphone giant Huawei, on U.S. fraud charges is seen in Beijing as an attack on China designed to block its technological advance. But an unintended result could be to bolster China’s global rise by pushing the country to increase subsidies and protection of its tech companies, according to analysts. That would be the polar opposite of what the Trump administration is demanding in its trade war with China.

The Trump administration sees China’s drive to be a global leader in key technologies as a major threat to the United States. Its trade war is focused on preventing China from getting hold of cutting-edge American technology, and even on disengaging the United States’ economy from China’s in key areas.

Meng’s arrest and U.S. action against another Chinese tech company, ZTE, earlier this year posed an existential threat to Chinese interests — and sent a stark message to Beijing that major Chinese companies reliant on U.S. components could be toppled should the U.S. ban supplies to them.

That happened to ZTE in April after it violated U.S. sanctions on Iran and North Korea. A U.S. ban on American companies supplying chips for ZTE’s cellphones would have killed the company, if President Trump had not intervened to save it at the request of Chinese President Xi Jinping. Both Huawei and ZTE rely on a range of U.S. technologies, including software and semiconductors.

Whatever happens with the Meng case — and with trade talks — the damage of the arrest has been done, as far as China is concerned. It proved how vulnerable China’s top national companies are if they rely on American components such as chips and superconductors.

The result is that China will do whatever it takes to become self-reliant in key high technologies and to phase out American components as soon as it can, according to analysts, although that will take years.

“If they could do it tomorrow, they would do it,” said Kerry Brown, China analyst at the Lau China Institute at King’s College London.

China’s determination to reduce its vulnerability may end up cutting U.S. tech firms’ access to China’s massive market.

“The ZTE case and now Huawei in a different way basically will propel China to do all the things that America wants them to stop doing, that is subsidizing state and private companies to give them technological independence,” said Richard McGregor, an analyst on East Asia at the Sydney-based Lowy Institute think tank. “It will make them try even harder to do what America wants them to stop doing.”

The Trump administration levied tariffs on $200 million of Chinese goods, but Trump and Xi agreed at a dinner during the recent Group of 20 summit in Buenos Aires to suspend tariff hikes for 90 days to allow negotiations to end the trade war.

But even if they manage to make a deal on trade, things will not go back to the way they were. Meng’s arrest shocked China because Huawei is the country’s most visible corporate brand and the world’s largest telecom vendor with about 40% of the market, and the second-largest in terms of smartphone sales. ZTE is the fourth-largest telecom vendor.

For China to see its biggest and second-biggest telecom companies hit in less than a year was seismic.

“When your most important companies can just be frozen by the actions of one government … it’s an enormous problem,” said Brown.

That Trump’s national security advisor John Bolton knew of the planned arrest before Trump met Xi on the sidelines of the G-20 summit only added to the sense of injury.

Meng’s arrest is now part of legal process in Canada and the U.S., theoretically beyond the reach of politics, but Beijing does not see it that way.

“There’s no doubt they would see this not as the U.S. legal system working, but as a conspiracy against China as part of a larger plan to keep China down. I don’t think they think that the rule of law in America is the rule of law. They think it’s all politics,” McGregor said.

That perspective was reflected in Chinese state media, including the Global Times, which has decried the arrest as “a despicable rogue approach.”

On Sunday, China summoned the U.S. ambassador to Beijing to protest the detention and demanded that Washington cancel an order for Meng’s arrest.

“The primary intention is so clear and strategic — whatever the legal appearance and Iran or North Korea sanction-related causes — that is to make it as difficult as possible for China to develop its own high-tech capability and to become the United States’ strong competitor in one of the critical fields of power in the 21st century,” said Shi Yinhong, professor of international relations at People’s University in Beijing.

Wang Yong, deputy director of Peking University’s Center for New Structural Economics, said it appeared to be part of a bid to contain China’s rise to rival the United States.

“One has reason to believe the U.S. is targeting the advancement of the technology of China. The security hawks got into power and carry forward the strategy of containment” of China, he said.

“With the pressure from the U.S., China has no choice but to make more efforts to be self-sufficient in terms of technology,” Wang said.

Shi said there was no doubt the arrest would motivate China to avoid reliance on American technology.

“China has just realized how far it has to go and how hard the journey will be to achieve self-reliance in numerous major high-tech areas,” he added.

Brown said the deteriorating relations between the two countries meant that Meng’s arrest was seen in China as part of their growing rivalry.

“It’s part of the deterioration of relations over the past year or more and the fact they [are] much more edgy toward each other. Although there probably are legal, legitimate and neutral reasons for this event happening … it’s going to be fed into that narrative,” Brown said.

“It’s going to be hard to separate all that dense politics from the relatively straightforward issue of whether she, as an officeholder in this company, has done this that could be held to account, according to American or international law.”

Huawei is privately owned but deeply distrusted in the U.S. and was described by a congressional report in 2012 as “nefarious.”

China’s national intelligence law — passed last year — reinforces the doubts, with its requirement that all organizations and citizens cooperate with intelligence agencies. At a Senate Intelligence Committee hearing in February, the heads of the CIA, FBI and National Security Agency warned against buying Huawei phones.

U.S. suspicions have focused on its founder and chief executive, Ren Zhengfei, 74, Meng’s father and a deputy director of the People’s Liberation Army engineering corps, who, according to American officials, has close ties to the government.

Fueling suspicions is the key role that telecoms play, with superfast 5G mobile networks to be at the heart of new developments, including artificial intelligence, self-driving cars, smart cities and the internet of things.

“The problem is the sector [Huawei] is in — telecoms — is sensitive, and it’s sensitive anywhere,” Brown said. The United States has put pressure on its partners in the so-called Five Eyes intelligence network (Britain, Canada, Australia and New Zealand) to shut China out of 5G.

Huawei has been barred from 5G networks by the U.S., Australia and New Zealand because of fears it could be used in spying or denial-of-service attacks. British telecom giant BT Group is removing Huawei equipment from the core 3G and 4G networks of EE, the largest mobile network operator, and Huawei is not part of its 5G network.

“What we’ve seen in the last sort of year basically is America, Canada, Australia, the U.K., a lot of really important markets [for Huawei] tighten up and in some cases disappear,” Brown said. “No company, no matter what their kind of architecture, no company can survive that or put up with it. And I think Huawei is going to really hit these issues more and more because Huawei is not able to operate in the markets it wants to operate in.”

One of Xi’s trademark policies is Made In China 2025, his crucial bid to transform China from a low-wage, high-volume industrial economy into an advanced technical economy by 2025. The policy has identified 10 key high-tech industries in which China aims to be a global leader by 2025, including artificial intelligence, robotics, aerospace, transport, self-driving cars and clean energy.

The U.S. is worried that, with the weight of the Chinese state supporting them, Chinese tech companies could surpass American rivals — particularly given its insistence that foreign companies doing business in China operate with Chinese partners, leading to complaints from U.S. companies forced to share their technological secrets.

Both Huawei and ZTE are key to Xi’s Made in China 2025 plan, vital for the country’s prosperity and its capacity to support the burdens of a rapidly aging population in the decades to come.

“The truth is that China can’t be self-sufficient in some areas — certain agricultural products, energy and the like — and they have various strategies to address that,” McGregor said. “But they’re determined to be self-sufficient in major technologies, which have both an economic value in economies around the world and also have an intrinsic military value as well.”

As trade tensions have ramped up with U.S. alarm over the Made in China 2025 strategy, Chinese officials and state media, on orders in June from state censors, have stopped using the term. But that does not mean the campaign has gone away, McGregor said.

“That’s part of a strategic and tactical retreat. They’re going to try to play down the things that make America angry, but the truth is in fact the opposite. With Made in China 2025 they’re going to talk about it less but invest in it more.”

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