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Business Insider, Alex Lockie, 14 December, 2018

“It’s amazing that they’ve backed down because Xi personally put his name on it,” John Hemmings, the director of the Asia Studies Centre at the Henry Jackson Society told Business Insider.

“The fact that Xi is dumping a policy that has his name all over it is huge,” Hemmings said of the policy reversal.

He added that the new willingness to play ball with Trump on trade could amount to a “very slow incremental cave-in on the tariff war.”

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To ban or to Banbury?

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RUSI Commentary, 7 December, 2018

The surprising announcement that Meng Wanzhou, deputy chair of Huawei’s board and daughter of company founder Ren Zhengfei, was detained in Canada on an extradition request from the US over allegations that the Chinese telecommunications giant may have exported US–licenced technology to Iran in contravention of US sanctions has come at a tumultuous time for the company. Earlier in the week, British Telecom stated that it intends to strip out Huawei components from the core of its 4G network. And this comes on the heels of a speech by Alex Younger, Chief of the Secret Intelligence Service, who warned against the use of the Chinese telecommunications firm in the development of Britain’s 5G network. Given the ongoing review being undertaken by the Department for Digital, Culture, Media and Sport (DCMS) and the National Cyber Security Centre (NCSC) seeking to ensure that Britain’s ‘critical national infrastructure remains resilient and secure’, it is clear that there has been a significant shift in both global and UK stances towards the company.

The perception that Huawei might be too close to the Chinese government – and its military signals department – has been there from the very beginnings of the company. It is partly a legacy, perhaps, of founder Ren Zhengfei’s prior career as a military technologist in the PLA’s Information Technology research unit. According to Philippe Le Corre, an expert based at the Harvard Kennedy School, Chinese state banks have been extremely generous to the company as it expanded its operations across key sectors of the European telecommunications market.

However, Huawei is perhaps also the victim of the past reputational damage caused by the first wave of Chinese companies and their international behaviour. Concerns about how private Chinese companies moved hand-in-hand with the Chinese state first arose in the late 1990s, when a US Congressional study – the so-called Cox Report – revealed how the Chinese state used family ties, social connections and party membership to get Chinese corporations to carry out industrial espionage across the US defence and information technology sectors. Unlike the Soviet model, which gave primacy to the official intelligence organs, the Chinese model preferred a widely dispersed approach, using front companies, non-intelligence agencies and individuals, educational research exchanges, and friendly Chinese companies.

It is only a small leap for those same companies to be pressed from carrying out industrial espionage to transferring data – especially when their business model is handling data. Indeed, Huawei was accused of hacking the African Union (AU) IT system it helped build – including computing, data storage, and WiFi. Servers were transferring data from inside the AU’s Addis Ababa headquarters to servers in Shanghai every night between 12 midnight and 2am. The fact that such practice has been codified in Chinese law, whereby Chinese companies are obliged to assist the nation’s intelligence agencies, puts paid to the idea that Huawei could resist pressure from Beijing.

This very concern was uppermost in the mind of Malcolm Rifkind when he oversaw the publication of an Intelligence and Security Committee report in 2013, Foreign Involvement in the Critical National Infrastructure: The Implications for National Security. This report and one published the year before by the US Congress Permanent Select Committee on Intelligence identified a number of systemic risks in allowing Huawei or ZTE – another Chinese telecommunications giant – to insert technology into the national network. First, it would allow the entity to modify or steal data from the government, private citizens, and corporations. While one might argue that China could simply hack those entities, the 2013 report quotes the Joint Intelligence Committee’s argument that network access ‘would be very difficult to detect or prevent and could enable the Chinese to intercept covertly or disrupt traffic’. Second, insertion of backdoor code or malicious hardware could allow an entity to shut down or degrade critical national security systems in a time of crisis or war. When one thinks of the importance of data on the UK financial network, one realises what a capable weapon this network access would be. Nor would this be a one-time risk, when 5G infrastructure is being laid down. Huawei also offers a service known as systems maintenance. This provides technicians with authorised access in the form of software updates and patches to glitches. Such access offers additional avenues for inserting malicious code.

Until this year, the British answer to such concerns was the creation of a Huawei Cyber Security Evaluation Centre (CSEC) at Banbury, which was staffed by employees and technicians from GCHQ who checked over all code and hardware used by Huawei in the United Kingdom. This has sought to mitigate risk and identify threat somewhat successfully for over eight years – until this past summer. This July, just prior to the announcement of the DCMS/NCSC review, the evaluation centre at Banbury issued a report which found that ‘shortcomings in Huawei’s engineering processes have exposed new risks in the UK telecommunication networks and long-term challenges in mitigation and management’. Whether this means that Huawei will be banned from developing 5G in the UK – as it has in the US, India, Australia and New Zealand – is unclear. It might well be that the UK mitigation model can adjust to the more severe levels of scrutiny required by 5G code. If we were to read into Younger’s speech this week, it would appear that the intelligence agencies have – for the moment, anyway – come to their own conclusions about the future viability of the CSEC system.

While there are no easy answers to the debate over Huawei, it is important to note that in asking for Meng Wanzhou’s detention and extradition, the US is sending its allies a strong signal about doing business with the company. Whether or not those reasons are fully substantiated remains to be proven. However, the conclusions of the 2013 Intelligence and Security Committee report are worth bearing in mind: ‘The Government’s duty to protect the safety and security of its citizens should not be compromised by fears of financial consequences’. While the chances might be low, the consequences of malicious infiltration by the Chinese state into our network would be disastrous.


Huawei CFO’s arrest could torpedo Trump and Xi’s cease-fire and rock the smartphone giant

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Business Insider, 6 December, 2018

  • The news that Meng Wanzhou, the CFO at the Chinese electronics giant Huawei, has been detained by Canadian authorities and is facing extradition to the US to face charges over illegal trade to Iran is much bigger than it might first appear.
  • It comes at a time when the Western intelligence agencies are reconsidering Huawei’s presence in their countries’ digital infrastructure.
  • It may also put at risk the delicate trade cease-fire created by China and the US at their leaders’ dinner last weekend.
  • In April, a congressional bill punished the Chinese company ZTE for the same behavior Huawei stands accused of — and the company’s stock dived 30% at a cost of nearly $7 billion in market value.

The news that Meng Wanzhou, the CFO at the Chinese electronics giant Huawei, has been detained by Canadian authorities and is facing extradition to the US to face charges over illegal trade to Iran is much bigger than it might first appear.

First, it comes when the West, particularly the so-called Five Eyes partners (Australia, the UK, the US, Canada, and New Zealand), are reconsidering Huawei’s presence in their digital infrastructure.

Second, it may put at risk the delicate trade cease-fire created by China and the US at their leaders’ dinner last weekend.

The UK has been reviewing its use of Huawei to build its 5G architecture. As Huawei has long been accused of maintaining links — through its founder, Ren Zhengfei — to China’s military industrial complex, the willingness of Western countries to allow it to develop their networks has waxed and waned. Philippe Le Corre, a French expert based at the Harvard Kennedy School, has tracked how Beijing has extended state support, in the form of cheap loans, to the company as it expanded its operations in Europe.

This year alone, India and New Zealand have moved to ban the Chinese firm, following in the footsteps of the US and Australia. Germany, like the UK, is reconsidering its options. While Canada is at the center of Meng’s arrest, the Trudeau government has been fairly friendly toward Chinese investment and is sure to go through its own debate.

While Meng’s arrest is not directly tied to the issue, it could affect how the US deals with Huawei as a company. If, for example, Huawei is found guilty of intentionally allowing US-licenses technologies to be exported into Iran, then US companies and suppliers could be prohibited from dealing with the firm.

Could Huawei go the way of ZTE?

In the wake of a congressional bill that punished the Chinese company ZTE for the same behavior in April, ZTE’s stock dived 30% and the company lost nearly $7 billion in value. While a political settlement allowed the company to continue operating, it is a stark warning to what could befall its bigger rival, Huawei.

A ban from US supplier chains would also put an unofficial nix on the company and make it increasingly difficult for countries like the UK to continue operating as they are. The current arrangement, developed after a 2011 parliamentary report on Huawei, was for UK government technicians to inspect Huawei components and code at a site paid for by the Chinese firm in Oxfordshire.

That risk-mitigation approach could be said to already be in trouble in light of a report this summer that said Huawei’s engineering processes allowed for grave vulnerabilities to be inserted into UK infrastructure. While no issues have been found, experts say finding such backdoor code in the immeasurably more complex 5G system will be nearly impossible.

Second, the US is no stranger from carrying out moves from one side of its government that contradict delicate negotiations.

In the past, we saw the US Treasury nearly destroy delicate Six-Party Talks with North Korea when it froze North Korean financial assets. However, with the Trump administration, it might well be a type of pressure.

This president is, after all, the most Chinese-style leader the US has, using a mixture of charm and blunt coercion to shape the negotiations with other powers. While China has moved troops onto India’s border as New Delhi hosted President Xi Jinping, so has President Donald Trump overseen the arrest of a prominent Chinese scion of a major global tech company.

How Beijing reacts, and its willingness to put Huawei on the table — before the tariffs freeze — will say much about where it sees the US relationship going and how important the tech giant is to its geopolitical strategy.

Time will tell.


Lessons from the America-Japan Trade War of the 1980s

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The National Interest, with James Amedeo, 2 July, 2018

The current wisdom is that there are no winners in trade wars. This message is inherent in nearly all coverage on the United States President Trump administration’s tariffs campaign on China, the European Union, and Japan. However, is this really true? History tells us that sometimes, there are winners in trade wars—all it takes is for one side to blink first.

In the 1980s and 1990s, the White House was faced with a powerful Asian economic power that manipulated its currency, subsidised its companies, and erected stiff non-tariff barriers to imports. Washington’s response was to put 100% tariffs on electronics, force voluntary restrictions on the aggressor’s auto, steel, and machine industries, and adopt laws that restricted the country’s steel, lumber, and sugar industries. But this wasn’t a nascent People’s Republic of China (PRC), it was the U.S. treaty-ally, Japan.

For approximately a decade, Japan and the United States engaged in a small-scale trade war. The United States achieved a tactical victory in the war with the 1985 Plaza Accord when the U.S. argued that it and Japan should abandon the fixed exchange rates that had prevailed after the Second World War. The result was that U.S. imports dropped in price as the dollar fell and Japan entered the bubble economy, which was ultimately to lead to the Lost Decade.

While there are many differences between the PRC now and Japan in the 1980s—the PRC is an authoritarian power and a peer competitor, rather than a U.S. ally—there does seem to be similar structural features in how the two approached trade, and how they approached access to their home market.

Thus far, the PRC’s strategy has been to respond to U.S. measures in kind. This reciprocity is somewhat ironic, given widespread complaints about Beijing’s lack of market access reciprocity. President Xi’s economic adviser, Liu He, has been the central player behind this approach. Shortly after Trump gave the green light on tariffs worth $50 billion of Chinese products Beijing retaliated with tariffs of their own that totalled up to $34 billion. Liu He even went so far as to pick the same date to enact their tariffs, July 6.

The difference between the two sets of tariffs lies in the contents. The Trump tariffs focus on parts and components used in high-technology manufacturing, machinery, automobiles, and transportation, while Xi’s tariffs focus mainly on agriculture exports like soybeans. This latter strategy seems odd until one realizes the Chinese dependency on U.S. high-tech. These items are unlikely to be targeted by Lieu He as long as Made in China: 2025 is a crucial part of Xi’s platform. Under that plan, China aims to improve its domestic production of high-end technology.

The Trump team has, of course, realized this, and therefore focused primarily on this area, both to stop the loss of valuable American intellectual property and to put pressure on the PRC through the threat of urban job losses. The example of the Chinese company ZTE is telling. With 74,000 workers jobs risked by its expulsion from the U.S. economy, Beijing focused the entirety of its next move on attempting to remedy this. While the PRC’s attack on farmers—who are a part of Trump’s voter base—threatens success in the Midterms, the White House’s attack on ZTE was much quicker, and some would say, more effective at moving Beijing.

There is a lot of noise around Trump’s tactics, saying that he represents chaos or anarchy. However, if one looks at the U.S.-China relationship since he came into office, one can discern a pattern.

First, communicate with the other side that you are unhappy and want to negotiate. One could argue that this occurred during the Presidential campaign when Trump consistently repeated the trope that China was “killing the American economy.” Second, develop a personal relationship with your opponent and give him time to make an offer. This occurred when President Xi was invited to the President’s estate at Mar-a-Lago. Filled with personal bonhomie, the president also joked during the Press Conference that Xi had not given him anything yet.

Second, if you are ignored, give the other guy something to think about. Cause him pain. This is not meant to be punitive, but to prod the opponent into really engaging with you. Famously, Beijing has promised structural reforms to previous U.S. administrations, only to renege. The first round of steel tariffs was a sign that Trump’s patience had finally run out. Perhaps symbolically, the replacement of Gary Cohn by Peter Navarro at that time as Trump’s key economic advisor was a message the U.S. would now be taking a more hard-handed approach.

Whatever the drivers are for the tariffs the end goal should remain the same for the Trump administration—Washington needs to focus on structural reform in China rather than on the reduction of the trade deficit. The trade deficit of $375.57 billion has become a useful political tool in Washington and, while it may be powerful, it is also dangerous. This is because it focuses on the symptoms, rather than the cause. In the words of former U.S Under Secretary of Commerce Frank Lavin, “If they give you a check, watch out. They’re sort of buying you off and getting you just to go away for that money.”

Trump could ‘win’ this trade war by getting Beijing to blink by seriously addressing the structural and intellectual property concerns raised in the March U.S. Trade Representative report. Whether Xi can make these changes and continue his China Dream, on the other hand, is debatable.

Jeremy S. Maxie

Energy & Political Risk Consultant

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