Ar­rest of tele­com ex­ec­u­tive re­veals real trade war with China

The Morning Call - - TOWN SQUARE - By Noah Smith Noah Smith, who was an as­sis­tant pro­fes­sor of fi­nance at Stony Brook Univer­sity, is a Bloomberg Opin­ion colum­nist and blogs at Noah­pin­ion.

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

But the star­tling ar­rest in Canada of a Chi­nese tele­com com­pany ex­ec­u­tive should wake peo­ple up to the fact that there’s a se­cond U.S.-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, Wanzhou Meng, is the chief fi­nan­cial of­fi­cer of tele­com-equip­ment man­u­fac­turer Huawei Tech­nolo­gies Co. (and its founder’s daugh­ter). The of­fi­cial rea­son for her ar­rest is that Huawei is sus­pected of selling tech­nol­ogy to Iran, in vi­o­la­tion of U.S. sanc­tions.

It’s the se­cond big Chi­nese tech com­pany to be ac­cused of breach­ing those sanc­tions — the first was ZTE Corp. in 2017. The U.S. pun­ished ZTE by for­bid­ding it from buy­ing Amer­i­can com­po­nents — most im­por­tantly, tele­com chips made by U.S.based Qual­comm Inc.

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. But these episodes high­light Chi­nese com­pa­nies’ de­pen­dence on crit­i­cal U.S. tech­nol­ogy.

The U.S. still makes — or at least, de­signs — the best com­puter chips in the world. China as­sem­bles lots of elec­tron­ics, but with­out those cru­cial in­puts of U.S. 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’re about mak­ing life harder for the main com­peti­tors of U.S. tech com­pa­nies.

Huawei just passed Ap­ple Inc. 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. U.S. moves against Huawei and ZTE may 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 U.S. tech com­pa­nies, as well as the mil­i­tary in­tel­li­gence com­mu­ni­ties, are in­flu­enc­ing pol­icy here as well.

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

Although na­tional se­cu­rity is cer­tainly a con­cern, it’s 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 U.S. tech­nol­ogy com­pa­nies, through the Com­mit­tee on For­eign In­vest­ment in the United States. CFIUS has al­ready can­celed a bunch of Chi­nese deals:

The goal of in­vest­ment re­stric­tions is to pre­vent Chi­nese com­pa­nies from copy­ing or steal­ing Amer­i­can ideas and tech­nolo­gies. Chi­nese com­pa­nies can buy Amer­i­can com­pa­nies and trans­fer their in­tel­lec­tual prop­erty over­seas, or have their em­ploy­ees train their Chi­nese re­place­ments. Even mi­nor­ity stakes can al­low a Chi­nese in­vestor ac­cess to in­dus­trial se­crets that would oth­er­wise be off-lim­its. By block­ing these in­vestors, the Trump ad­min­is­tra­tion hopes to pre­serve U.S. tech­no­log­i­cal dom­i­nance, at least for a lit­tle while longer.

Notably, the Euro­pean Union is also mov­ing to re­strict Chi­nese in­vest­ments. The fact that Europe, which has op­posed Trump’s tar­iffs, is copy­ing Amer­i­can in­vest­ment re­stric­tions, should be a sig­nal that the less-pub­li­cized high-tech trade war is ac­tu­ally the im­por­tant one.

The high-tech trade war shows that for all the hoopla over man­u­fac­tur­ing jobs, steel, au­tos and tar­iffs, the real com­pe­ti­tion is in the tech sec­tor. Los­ing the lead in the global tech­nol­ogy race means lower prof­its and a dis­ap­pear­ing mil­i­tary ad­van­tage.

But it also means los­ing the pow­er­ful knowl­edgein­dus­try clus­ter­ing ef­fects that have been an en­gine of U.S. eco­nomic growth in the post­man­u­fac­tur­ing age. Bluntly put, the U.S. can af­ford to lose its lead in fur­ni­ture man­u­fac­tur­ing; it can’t af­ford to lose its dom­i­nance in the tech sec­tor.

The ques­tion is whether the high-tech trade war will suc­ceed in keep­ing China in se­cond place. China has long wanted to catch up in semi­con­duc­tor man­u­fac­tur­ing, but ex­port con­trols will make that goal a ne­ces­sity rather than an as­pi­ra­tion. And in­vest­ment re­stric­tions may spur China to up­grade its own home­grown re­search and devel­op­ment ca­pac­ity.

In other words, in the age when China and the U.S. were eco­nom­i­cally co-de­pen­dent, China might have been con­tent to ac­cept lower profit mar­gins and keep copy­ing Amer­i­can tech­nol­ogy in­stead of de­vel­op­ing its own.

But with the com­ing of the high-tech trade war, that co-de­pen­dency is com­ing to an end. Per­haps that was al­ways in­evitable, as China pressed for­ward on the tech­no­log­i­cal fron­tier.

In any case, the Trump ad­min­is­tra­tion’s re­cent moves against Chi­nese tech — and some sim­i­lar moves by the EU — should be seen as the first shots in a long war.


Meng Wanzhou (right), chief fi­nan­cial of­fi­cer of Huawei Tech­nolo­gies, at­tends her bail hear­ing Fri­day at Bri­tish Columbia Supreme Court in Van­cou­ver. She faces ex­tra­di­tion to the United States on charges of try­ing to evade U.S. sanc­tions on Iran.

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