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Ask Huawei about The “Coming” U.S.-China Trade War

Daniel J. Ikenson

Speculation is rampant that President Trump will soon announce
sanctions against China for its heavy-handed intellectual property
and technology transfer policies, cavalierly thrusting us into a
deleterious trade war. Huawei Technologies has news for these
speculators: For over a decade, Washington and Beijing have been
waging a tit-for-tat technology trade war, which is escalating and
claiming victims as you read.

The latest hostilities occurred Monday when AT&T, poised to
deliver its long-gestating plan to sell smart phones produced by
Chinese technology giant Huawei, instead abruptly announced that it
was aborting that plan. If history is any guide, AT&T likely
was compelled to change course by U.S. policymakers with leverage
to affect the telecom’s fortunes.

China’s technology ambitions, which at times have been
promoted and advertised with brazen disregard for intellectual
property and the norms of international trade and investment, are
increasingly in the crosshairs of U.S. policymakers. Since at least
2006, Beijing has been promoting discriminatory indigenous
innovation policies, which accord preferential treatment to
companies that develop or register their intellectual property in
China. In 2009, the American Chamber of Commerce in China issued a
report that exposed “a web of industrial policies,” as
well as Chinese government plans to build national champions by
“borrowing” Western technology.

More recently, Beijing approved a $160 billion investment to
help close the technology gap between the domestic semiconductor
industry and the world’s cutting-edge firms. The government
also implemented two new laws—the National Security Law and
the Cybersecurity Law—which aim to tighten state control over
information by requiring data and technology used in certain
sectors of the economy to be “secure and controllable.”
U.S. companies are concerned that the Cybersecurity Law’s
vague objectives and ambiguous language grant too much discretion
to Chinese authorities, who could require firms to share source
code and other proprietary information to gain market entry. Forced
technology transfer has been a long-standing complaint of U.S.
companies.

Meanwhile, China’s “Made in China 2025”
initiative, which is Beijing’s roadmap for achieving
technological preeminence, has put U.S. policymakers on the
defensive, causing all Chinese acquisitions of U.S. (or other
foreign) technology companies to be viewed with suspicion. Just
last week, China’s ANT Financial’s bid to acquire U.S.
MoneyGram was rebuked by the Committee on Foreign Investment in the
United States (CFIUS), which has become an increasingly
insurmountable obstacle to technology acquisitions over the past
year.

What does this have to do with Huawei? Well, rather than attempt
to resolve these issues by bringing complaints to the World Trade
Organization, the United States chose to impose de facto bans on
Chinese technology firms and to make it more difficult for Chinese
companies to acquire U.S. technology. Over the years,
Huawei—one of the world’s most successful information
and communications technology companies—has been held
accountable for the Chinese government’s transgressions (both
real and imagined). Huawei has been crucified for the sins of its
government, standing accused of being affiliated with the
People’s Liberation Army and a conduit for
cyber-malfeasance.

In 2008, Huawei’s bid to acquire U.S. software company
3Com was scuttled by opposition from U.S. policymakers and CFIUS on
the grounds that the transaction, if consummated, would present a
threat to U.S. national security. In 2011, the U.S. House Permanent
Select Committee on Intelligence initiated an investigation into
whether Huawei and ZTE (another Chinese ICT company) presented
security threats to U.S. telecommunications networks. The
investigation culminated in a report recommending that U.S.
firms—especially telecoms with hopes of participating in
federally funded infrastructure projects—avoid contaminating
their supply chains with equipment and components produced by these
Chinese companies.? But the report contained no evidence to support
the claims—only innuendo.

Six months after publication of the House Intelligence Committee
report, U.S. lawmakers inserted language into the Continuing Budget
Resolution making it illegal for U.S. government agencies to
purchase or use Chinese ICT products.? Later that year, as
conditions for its approval of a Japanese telecommunications
company’s acquisition of Sprint Nextel, CFIUS required the
purchaser, Softbank, to purge Chinese ICT components from its
supply chain and to obtain preapproval from the U.S. government for
any new vendors it wished to bring into its supply chain.? Similar
notification and approval conditions have been required in
subsequent acquisitions.

Although the public record is devoid of any evidence to support
the assertions that Huawei is a bad actor, the company has
essentially been shut out of the U.S. market by way of U.S.
policymakers reminding the big telecoms that they have much to lose
if they do business with Huawei.

Considering that Huawei products are ubiquitous throughout the
world and that the company partners with British Telecom in
building and servicing telecommunications networks in the United
Kingdom, might it be possible that protectionism is masquerading as
a national security imperative in this case? Might AT&T’s
decision to drop Huawei have something to do with its desire to win
approval for its pending merger with Time-Warner?

For those wondering how the Trump administration might
“retaliate” against China for any infractions it finds
during the course of its Section 301 investigation, bear in mind
that “pretaliation” is already underway. The U.S.
government has chosen to address China’s pursuit of its
technological ambitions by depriving Chinese tech companies of both
U.S. technology and U.S. consumers. Along with providing a false
sense of cybersecurity, that approach is sure to reduce the scope
for innovation, collaboration, and economic growth, and it will
threaten the global trading system.

All of that might be averted if the Trump administration uses
the evidence it obtains from its Section 301 investigation to file
a formal challenge of China’s practices at the WTO and
Beijing, likewise, launches a WTO challenge of U.S. restrictions of
Chinese ICT companies. The outcomes might then be parlayed into an
enduring solution devoid of debilitating unilateral sanctions.

Daniel J.
Ikenson
is director of the Cato Institute’s Herbert A. Stiefel
Center for Trade Policy Studies and author of the 2017 policy
analysis: Cybersecurity or Protectionism: Defusing the Most
Volatile Issue in the U.S.-China Relationship
.