Wed, Dec 12, 2018 - Page 9 News List

Huawei executive arrest reveals the real trade war with China

While tariffs rule the headlines, Washington is silently waging a battle to hinder the upstart Chinese high-tech industry

By Noah Smith  /  Bloomberg Opinion

Illustration: Mountain People

If you only scan the headlines, you could be forgiven for thinking that the US-China trade war is mainly about tariffs. After all, US President Donald Trump and trade-warrior-in-chief has called himself “Tariff Man.” And a tentative trade deal between Trump and Chinese President Xi Jinping (習近平) was mainly about tariffs, especially on items like cars.

However, the startling arrest in Canada of a Chinese telecom company executive should wake people up to the fact that there is a second US-China trade war going on — a much more stealthy conflict, fought with weapons much subtler and more devastating than tariffs. And the prize in that other struggle is domination of the information technology industry.

The arrested executive, Meng Wanzhou (孟晚舟), is the chief financial officer of telecommunications equipment manufacturer Huawei Technologies Co (華為) — and its founder’s daughter. The official reason for her arrest is that Huawei is suspected of selling technology to Iran, in contravention of US sanctions.

It is the second big Chinese tech company to be accused of breaching those sanctions — the first was ZTE Corp (中興) last year. The US punished ZTE by forbidding it from buying US components — most importantly, telecom chips made by US-based Qualcomm.

Those purchasing restrictions were eventually lifted after ZTE agreed to pay a fine and it seems certain that Huawei will also eventually escape severe punishment. However, these episodes highlight Chinese companies’ dependence on critical US technology.

The US still makes — or at least, designs — the best computer chips in the world. China assembles lots of electronics, but without those crucial inputs of US technology, products made by companies such as Huawei would be of much lower quality.

Export restrictions, and threats of restrictions, are thus probably not just about sanctions — they are about making life harder for the main competitors of US tech companies.

Huawei has passed Apple to become the world’s second-largest smartphone maker by market share (Samsung Electronics Co is first). This marks a change for China, whose companies have long been stuck doing low-value assembly while companies in rich countries do the high-value design, marketing and component manufacturing. US moves against Huawei and ZTE might be intended to force China to remain a cheap supplier instead of a threatening competitor.

The subtle, far-sighted nature of this approach suggests that the impetus for the high-tech trade war goes far beyond what Trump, with his focus on tariffs and old-line manufacturing industries, would think of. It seems likely that US tech companies, as well as the military and intelligence communities, are influencing policy here as well.

More systematic efforts to block Chinese access to US components are in the works. The Export Control Reform Act, passed in the summer, increased regulatory oversight of US exports of “emerging” and “foundational” technologies deemed to have national security importance.

Although national security is certainly a concern, it is generally hard to separate high-tech industrial and corporate dominance from military dominance, so this too should be seen as part of the trade war.

A second weapon in the high-tech trade war is investment restrictions. The Trump administration has greatly expanded its power to block Chinese investments in US technology companies through the Committee on Foreign Investment in the US, which has already canceled a number of Chinese deals.

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