On Dec. 1, the United States and China agreed to a truce in their trade war, but that same day Canadian authorities arrested the chief financial officer of one of China's most important tech companies, Huawei. Huawei has been the chief target of U.S. pressure on Chinese tech companies, and this new development adds another layer of complication to the already awkward trade negotiations between Beijing and Washington.
What Happened
Canada's Department of Justice announced in a Dec. 5 statement that it had arrested Meng Wanzhou, the chief financial officer of prominent Chinese tech company Huawei, in Vancouver on Dec. 1 at the request of the United States. Meng is the daughter of Huawei founder Ren Zhengfei. According to Canadian Justice Department spokesman Ian Mcleod, Meng is facing extradition to the United States over suspicions that she violated U.S. sanctions on Iran.
Huawei is the world's second-largest manufacturer of smartphones after Samsung and is arguably China's most important hardware technology company. China will likely perceive Meng's arrest as a U.S. strategy to undercut the company, and the impending investigation — especially in the likely event that it expands beyond Meng into a broader investigation of Huawei — is sure to increase tension between Beijing and Washington as the two navigate their trade war over the coming three months.
On the Heels of ZTE
Accusations that Huawei violated U.S. sanctions on Iran have been floating since an earlier sanctions violation investigation into ZTE, another large Chinese hardware company, ended in 2016. the United States released internal ZTE documents in which the company described a large competitor – only called "F7" – skirting U.S. sanctions. F7 has widely been assumed to be a codename for Huawei.
In April of this year, leaks from anonymous U.S. officials suggested that there was already an active criminal investigation into Huawei for violating Iran sanctions. During that time, the United States and China were already tussling over Washington's decision to ban U.S. suppliers from exporting to ZTE in the wake of that company's sanctions violations. (This initially happened in the ZTE case, but it was only after ZTE violated the terms of that settlement by giving bonuses rather than punishment to involved employees that the United States threatened the supplier ban.)
Why Huawei Matters
Huawei's overall value to China and the global technology hardware competition dwarfs ZTE's. In addition to being the world's second-largest smartphone maker, it's also the world's largest producer of radio access network gear for the telecommunications sector and, critically, for 5G.
The United States has previously sought to persuade its allies not to use Huawei's 5G gear over concerns that China could exploit it for intelligence purposes, and it has barred telecommunications companies receiving U.S. public funds from deploying Huawei 5G technology. Australia and New Zealand have made similar moves, while Canada, Germany and the United Kingdom are currently discussing Huawei 5G equipment bans.
How An Export Ban Could Hurt Huawei
The Meng arrest and current U.S. investigation into Huawei have the potential to significantly hamper the company's economic health and viability, meaning China will consider it yet another example of the United States employing what Beijing perceives to be "modern gunboat diplomacy." Washington's short-lived ban on U.S. suppliers exporting to ZTE, which brought the company to the brink of implosion, provides another example.
The same would happen to Huawei. A list of its 92 core suppliers that Huiwei published in November is dominated by U.S. tech heavyweights like Intel and contains a total of 33 U.S. companies. (That number excludes NXP Semiconductors, a Dutch company that has extensive production facilities in the United States.) Just 29 of Huawei's core suppliers are from mainland China or Hong Kong.
Trade War Sparring Continues
The United States attempted to use the damaging impact of the ZTE export ban to extract concessions from Beijing, hoping that China would be pushed into approving a merger of semiconductor developers Qualcomm and NXP. (Ultimately, Beijing rejected the merger.) Washington will almost certainly use the Huawei investigation as ammunition in its trade war as well.
With its many trade and tariff escalation threats, China has shown that it values reciprocity in its dynamic with the United States. As possible retribution over Meng and Huawei, Beijing could rely on the ambiguous and sometimes contradictory nature of Chinese laws to justify arrests of high-profile U.S. executives in China for violations.
The reality is that a ban on U.S. exports to Huawei would be far more damaging to China than any trade war with Washington.
China could also threaten to pull out of trade negotiations entirely. However, at this point, such a move would only provoke more aggressive U.S. behavior, which China simply can't afford. Huawei is far larger and more important to the Chinese economy than is ZTE, so any potential retaliation could prompt the United States to ban U.S. suppliers from exporting to the company. And the reality is that a ban on U.S. exports to Huawei would be far more damaging to China than any trade war with Washington.
What's Next for the U.S. and China
Over the coming weeks, it will be important to track the investigation's scope and identify any potential settlement negotiations between Huawei and the United States. Typically, sanctions violations do not result in export bans but rather settlement offers from the Justice Department that include a large fine and an action plan for punishing employees involved in the violations. The China hawks in the U.S. government will be calling for significant punishment in the case, whereas China will be trying its hardest to protect Huawei by steering the decision toward a settlement.
More broadly, continued threats of an export ban and concerns about reliance on U.S. components, technology and intellectual property will only push China and Huawei to accelerate efforts to develop their own indigenous capabilities, further spurring the power competition between China and the United States.
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