U.S.-China trade talks will confront a potentially explosive test early, as the chief financial officer of Chinese telecom giant Huawei Technologies faces extradition to the United States following her arrest in Canada.
The executive, Meng Wanzhou, is also the daughter of the company’s founder. She was arrested on Dec. 1 — the same day President Trump and Chinese President Xi Jinping hashed out a preliminary trade truce over dinner in Buenos Aires — on suspicion of violating U.S. sanctions on Iran. A bail hearing has been set for Friday, The Washington Post’s Emily Rauhala and Ellen Nakashima report. The Justice Department isn’t providing any details.
Huawei, the world’s third-largest cellphone maker, has faced scrutiny from U.S. officials over suspected export control violations for years. A 2012 report from the U.S. Permanent Select Committee on Intelligence identified the company — and fellow Chinese telecom champion ZTE — as potential national security threats for their ties to the government. The Commerce Department subpoenaed records from Huawei back in 2016, the New York Times reported at the time, and the Justice Department has been looking into whether it ran afoul of sanctions on Iran, the Wall Street Journal reported in April of this year.
But Meng’s arrest comes at a particularly sensitive time, as the Trump administration starts a three-month sprint with Beijing toward trying to resolve long-simmering American complaints over predatory Chinese commercial behavior. The Chinese are set to send a delegation to Washington next week to kick off negotiations.
“This case alone may not scupper the talks, particularly if there is clear evidence and the U.S. has scrupulously adhered to legal procedures in detaining the accused executive,” Scott Kennedy, director of the project on Chinese business and economy at the Center for Strategic and International Studies, said in an email. “But if other shoes drop in the tech space, it may be extremely hard for the Chinese to keep issues that sit astride the boundary of national security and high-tech business from infecting the negotiations on the overall commercial relationship. We are at a very precarious moment in the history of our relationship and, in fact, the international order.”
From Silvercrest Asset Management chief strategist Patrick Chovanec:
A huge leverage point has just been dropped in the Trump Administration’s lap. But a highly volatile one too.— Patrick Chovanec (@prchovanec) December 5, 2018
The Trump administration has been down this road. In April, the Commerce Department dealt what would have been a death blow to another Chinese telecom champion, ZTE, when it barred American firms from exporting to it as punishment for violating U.S. sanctions on Iran and North Korea. Xi prevailed on Trump in a personal appeal to lift that ban.
“The Huawei news brings back to mind the ZTE sanctions announcement last spring which negatively affected the ongoing trade talks at that time,” Wendy Cutler, vice president of the Asia Society Policy Institute and a former U.S. trade negotiator who dealt with China, said in an email. She called Meng’s arrest “yet another complicating factor” in the upcoming talks, “which are already facing a whole host of challenges.”
The Chinese Embassy in Canada released a statement demanding Meng’s release and blasting the United States and Canada. “The Canadian police, at the request of the United States, arrested a Chinese citizen who had not violated any U.S. or Canadian law,” the statement read. “China has already made solemn representations to the United States and Canada, demanding they immediately correct their wrong behavior and restore Ms Meng Wanzhou’s freedom.”
And the arrest also helped trigger a global stock sell-off. "The Hang Seng China Enterprises index of large-cap Chinese companies listed in Hong Kong dropped 2.6 per cent. Shares of ZTE, a rival Chinese telecoms equipment maker, tumbled more than 5.7 per cent," per the Financial Times. "In Europe, Germany’s Dax dropped 2.5 per cent and the FTSE 100, London’s benchmark of blue-chip stocks, dropped by a similar amount. S&P 500 futures extended their drop to 1.9 per cent."
Some China watchers noted that the move against Huawei continues a pattern of tightening pressure on Chinese companies accused of violating U.S. law. “This type of action has gained strong support from China hawks in the administration who believe China has gotten away with sanctions violations, cyber theft of IP, and other transgressions without paying a sufficient price,” Eurasia Group’s Paul Triolo wrote in a Wednesday night note. “The arrest of the senior Huawei officials suggests that the gloves are now fully off in this arena, and US law enforcement officials have a green light from senior administration officials to pursue … individuals the US may not have gone after in a more benign bilateral political climate.”
From The Economist's Simon Rabinovitch:
Some context on Huawei & ZTE, the Chinese telco suppliers targeted by US. For China, they aren’t just big firms but pillars of its “new economy”: two biggest filers of patents globally last year, 15% of China’s applications. Hard not to see this as big escalation of tensions. pic.twitter.com/dMQjTIykKE— Simon Rabinovitch (@S_Rabinovitch) December 6, 2018
From China expert Bill Bishop:
This move can not be overstated. If the us says huawei violated Iran sanctions, like zte did, a zte-like ban for us suppliers to huawei is not impossible. May not go that far but expect investors to shoot first Thursday and dump shares of big huawei suppliers, as they did w zte https://t.co/Pg5FcgdFuG— Bill Bishop (@niubi) December 5, 2018
Both firms are in the middle of the global race for control of 5G telecom networks, the wireless technology expected to undergird the burgeoning Internet of Things. And both are facing crackdowns from the U.S. and its allies over concerns Beijing will tap the companies' equipment to spy or otherwise interfere with devices. Per The Post, "On Wednesday, British telecom firm BT said it will not use Huawei equipment in its 5G network. Last week, New Zealand did the same. In August, Australia banned Huawei and ZTE from its 5G networks."
Claire Reade, a former U.S. trade negotiator now with Arnold & Porter, said via email Meng's arrest would play well at home, "and if the evidence is very strong, will make China embarrassed and uncomfortable. In that case, it should not affect the trade talks fundamentally. Perhaps more important, it also reinforces that whatever trade truce may be imposed, the increasing vigilance and active enforcement against Chins reflects the skeptical underlying attitudes toward the relationship."
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