Congressional security report risks Chinese trade battle
Executives of two major Chinese technology companies, Charles Ding, of Huawei Technologies Ltd. (left), and Zhu Jinyun, of ZTE Corporation are sworn in on Capitol Hill before testifying before the House Intelligence Committee in September.
The powerful U.S. House Permanent Select Committee on Intelligence recommended that U.S. telecom operators and governmental agencies avoid business with Chinese tech giants Huawei and ZTE, according to its October 8 report.
The committee argues that deploying technology supplied by these companies poses a national security risk because of their ties to the Chinese government.
Based on the global market penetration of Huawei and ZTE, clearly this opinion is not shared by our allies like the European Union; nor for that matter, by our geopolitical competitors such as Russia.
Huawei conducts 70% of its business outside of China. Last year it generated more than $4 billion revenue in the European Union, and attained a market-leading position in Russia.
These two global information and communications technology leaders were almost unheard of outside of China 10 years ago. Today, Huawei, the larger of the two, is a $35- billion-per-year company with double-digit annual growth.
It’s the No. 2 global provider of cellular infrastructure after Ericsson, and No. 3 provider in data infrastructure. In all, Huawei supplies equipment to over 500 operators in 140 countries, serving 3 billion people. Huawei’s auditor is KPMG.
Despite Huawei and ZTE’s near universal acceptance and success around the world, the congressional report declares:
“The Committee on Foreign Investment in the United States (CFIUS) must block acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to U.S. national security interests. Legislative proposals seeking to expand CFIUS to include purchasing agreements should receive thorough consideration by relevant Congressional committees . . . U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects.”
Given that the congressional position is completely at odds with the prevailing world view, left unchecked, it will likely trigger trade retaliation from China against U.S companies.
Already, the Chinese PR machine is using the report to claim that the U.S. is protectionist and violates international free trade agreements. Indeed, the Congressional report does not appear consistent with the procedures and spirit of the World Trade Organization (WTO), to which both the U.S. and China belong.
The U.S. is isolated on this matter. The position is not consistent with our fundamental free-trade principals, and frankly there is little upside, either tactically or strategically. Unless the U.S. finds a way to back off, perhaps via the executive branch, the U.S. could very well get burned in this trade battle.
October 24, 2012 - 6:00 AM
Everybody who’s stunned that the Repub-led committee would issue a report like this raise your hand. Possible war with Iran. Possible trade war with China. Who knows what with Russia. Boy have we got a lot to look forward to if Rmoney wins.
http://www.amazon.com/ANCIENT-WISDOM-FOLLOWERS-Challenges-Authoritarian/dp/1935212818
I heard James MacGregor, the author of this book, when he was on On Point, an NPR radio show. His credentials regarding China you can read on the Amazon site. Part of what he said was that Chinese manufacturing and engineers are basically under orders to steal technology from other countries and present it as their own. Intellectual property theft is their model for growth. No wonder the Russians don’t share our concern…after Mir exploded and the Iraq war gave us a good look at Russian technology, I doubt anyone’s looking to steal it.
The particulars of this single case regarding Huawei don’t interest me much, but in the broader scheme of trade with China I don’t think the US needs to take instruction from Australia or the Czech Republic or whomever. We are by far China’s largest single trading partner, and it behooves us to protect ourselves accordingly.
Right, because we should totally start a trade war with a nation with whom we hold a 4:1 (import/export) trade ratio (by the way, we haven’t had a 1:1 ratio with them since February 1986). That doesn’t even take into account the money we owe them ($1.2 trillion).
On top of that, we can’t just say that it’s in our national interest to change the way we do business with them. No, we have to call doing business with them a threat to our national security, which is very nearly the equivalent of saying they’re an enemy of the state.
I wonder if I can call the bank and tell them I want to renegotiate my loan because their predatory practices are a threat to my personal security and I now consider them an enemy. They’re taking more than they put in, as well, are they not? Can I “get tough” with them? I tend to think that they would simply call in the marker, foreclose on my family farm and sell it to the highest bidder.
The difference is in the fact that if China calls in the marker, what are we to do? 3% of imports being Chinese doesn’t sound like much, but it translates into very, very bad things for our economy if the tap is shut off, and even then, we still owe the money. We are in a fragile economic state; now is not the time to force anyone’s hand.
You shouldn’t have to be responsible for that loan, J.M. There should be a few seedy shops here and there where you could just legally walk in and have it aborted. Then just start all over again responsibilty-free.
Kristen, first of all, at this point everyone conducts industrial espionage against everyone. This includes the U.S., Israel and France.
If you never heard of Huawei before, I am sure you will in the future. As noted in the essay, this $35B telecom infrastructure giant is now a state-of-the-art inovator. They are a major supplier throughout the world – this includes, UK, Germany and France, and practically all other countries in the EU.
When you say “protecting ourselves”, what exactly is it that we are protecting ourselves from. Most trade and technology experts believe the security arguments do not hold water.
Your statement that the US doesn’t need to take instruction from Australia or Czech Republic seems misguided. The US and China are members of WTO, and a WTO ruling against the US on this will have serious ramifications against the US. Also, China is one of the biggest markets for US infrastructure providers, such as General Electric. China has lots of leverage to retaliate.
US governmental action has hurt US business overseas on numerous occasions. Unless the course is reversed, this will be a costly blunder that hurts American companies, and thus American jobs. It won’t be the first time.
As Tom Freidman keeps repeating these days – we are in a hyperconnected world, Kristen. Congress just has not gotten used to calculating the cause-and-effect of their international meddling – either in wars or in business.
http://www.chinausfocus.com/finance-economy/has-the-u-s-debt-crisis-made-china-the-world%E2%80%99s-most-responsible-economic-power/
“The notion that China will stop buying U.S. treasury bonds or perhaps commence a massive sell-off of T-bills it already holds as a way to defend itself from financial losses or punish the U.S. for reckless behavior is unfounded. China has little choice but to continue buying U.S. debt in the near-term, even if the U.S. suspends interest payments to Beijing for a period of time. ”
China isn’t buying T bonds out of charity. They put their money here because the US represents a safe place to put it. They won’t do anything to devalue the investment because mostly, it would hurt them. It’s a mistake to conflate our trade policy with China and their tendency to invest in American debt. You can’t execute a put with treasure bonds – they come due when they come due. They could stop buying, but why would they?
Our trade deficit with China is more a reflection of our own poor policies than anything good they’re doing. As long as Americans are excited to buy cheap toothpaste filled with lead and dogfood made with plastic, it’s not going to change. But in the meantime we don’t have to hand them over our technological store, and I don’t think our addiction to Salad Spinners or whatever else crap they’re making needs to drive policy here.
MarkJ, participation in and cooperation with the WTO is, as with all supranational bodies, voluntary. They’ve been calling on us to shut down our farm subsidies for years and we ignore it, continuing to export our agricultural products to many places, China included.
As for industrial espionage being a constant, I don’t deny that. China’s making it a foundation for what they want to appear as their own growth.
http://www.bloomberg.com/news/2012-03-15/china-corporate-espionage-boom-knocks-wind-out-of-u-s-companies.html
“In November, 14 U.S. intelligence agencies issued a report describing a far-reaching industrial espionage campaign by Chinese spy agencies. This campaign has been in the works for years and targets a swath of industries: biotechnology, telecommunications, and nanotechnology, as well as clean energy. One U.S. metallurgical company lost technology to China’s hackers that cost $1 billion and 20 years to develop, U.S. officials said last year. An Apple Inc. (AAPL) global supply manager pled guilty in 2011 to funneling designs and pricing information to China and other countries; a Ford Motor Co. (F) engineer was sentenced to six years in prison in 2010 for trying to smuggle 4,000 documents, including design specs, to China. Earlier this month, the National Aeronautics and Space Administration told Congress that China-based hackers had gained access to sensitive files stored on computers at the Jet Propulsion Laboratory.
As the toll adds up, political leaders and intelligence officials in the U.S. and Europe are coming to a disturbing conclusion.
“It’s the greatest transfer of wealth in history,” General Keith Alexander, director of the National Security Agency, said at a security conference at New York’s Fordham University in January.”
The “greatest transfer of wealth in history” is pretty damning. I don’t see why we need to cooperate with it or make it any easier. You claim that experts are discounting security concerns – I’m happy to read something supporting that if you have it, but every single thing I’ve ever heard or read is diametrically opposite.
Apologies for the length…ugh.
Marked Man: We already have those. They’re called bankruptcy courts.
Regardless of jest, they hold zero relevancy to my comment. The bottom line is that whatever the government does under any administration to affect trade will always trickle down to us peons. Ultimately, good or bad, it is we who will pay the price for it.
Kristen, I think you are still missing the key point here. This is not about Congress blocking China from accessing US technology. To the contrary, Congress is doing everything to block US companies and their US customers from purchasing Chinese technology!
The Huawei telecom infrastructure technology is absolutely cutting edge. What they have today they did not steal from anyone, because they are first to market with many inovations, especially in cellular infrastructure, like LTE networks.
If we block companies like Huawei for no good reason, they will block companies like GE for no good reason from doing business in China.
Think about it. Your salad spinner comment is totally off the mark here.
Although we are trading partners, there seems to be a lot of mistrust of China by many in the US government. Not being the paranoid type, I tend to believe that our government takes our national security seriously – and they base decisions on the many US government officials who have seen the reports citing China [and Russia] as the most frequent thieves of US technology. Here is a site that has some interesting stories about just this topic. http://www.ncix.gov/publications/reports/fecie_all/media.php
Last month, this news flew way below our miserable “journalists’” radars. I waited to hear more on this matter, but the silence was deafening.
Obama Blocks China’s Second-Richest Man From Owning Wind Farm Near Secret Navy Base
“President Obama made a fascinating move yesterday in issuing an executive order prohibiting a Chinese company from owning and operating a wind farm near the Naval Weapons Systems Training Facility in Boardman, Ore. The base is said to be home to a fleet of unmanned drones and planes specializing in electronic warfare.
The order marks the first time in 22 years that a president has scotched the foreign acquisition of a business in the U.S.
The Sany Group is controlled by China’s second-richest man, Liang Wengen, who has recently been appointed to the Central Committee of China’s Communist Party. In our most recent tally of global billionaires, Forbes estimated his net worth at $8.1 billion.”
http://www.forbes.com/sites/christopherhelman/2012/09/29/obama-blocks-chinas-second-richest-man-from-owning-wind-farm-near-secret-navy-base/
Weird as it may be, especially after the WMD Bush fiasco, I still have faith and trust that our government, in security matters, knows better than those of us who do not see the daily briefings.
Sometimes trade and security issues collide.
MarkJ, I don’t think the issue can be segmented out independent of the greater security threat posed by Chinese espionage, industrial or otherwise. I know telecommunications is your specialty and you seem to admire the product Huawei is bringing to market, but that doesn’t address the question of how much control or investment we want China to have in American communication infrastructure. We have concerns other countries just don’t have, and maybe that manifests itself as paranoia or protectionism, but that doesn’t make the concerns less real.
And if they end up pitching GE, unfortunate, but I don’t think that the US can ever, ever be accused of not taking corporate interests into account when forming policy. We serially deploy our military, at great cost, to keep Corporate America comfortable. Just how much control can we cede to the military/industrial complex.
Kristen:
American foreign policy quite often puts US business at a disadvantage and American business complains about this all the time. Big Oil, infrastructure companies, companies like Caterpillar are frequently bringing this up. A big killer is the many low grade unilateral boycotts that the US Congress declares that people rarely read about.
But using the blanket claim of national security to block US telecom companies from purchasing telecom infrastructure equipment that the whole world uses, including our closest and most powerful allies, as well as our geopolitical competitors – well that is just blatent trade war driven by a Xinophobic Congress.
By the way, if you search on the Obama Administration position on this issue, in recent days they have in a low key manner noted that there own study has found no evidence to support the claims of the Congressional report.
The Administration is already trying to deal with this Congressional blunder.
There are entirely too many people in America who still cannot grasp the whole idea of a “world economy” or our place in it. This is part and parcel of the Romney/Ryan thinking on China and other nations. We would do best to remember that China “needs” us, less and less with every passing year and with other nations on the rise, that will continue. You cannot crawl into bed with China for the cheap labor and not expect them to want a kiss for their trouble.