Trade wars, mobile phones and supply chains

The US and China are embroiled in a huge trade war and it’s likely that most people don’t really understand the gravity of the situation.

US complaints about China are legitimate: it’s a closed market, with state-funded firms who export abroad but where foreign firms cannot really import goods and instead are required to setup joint ventures with local companies, in a sort of forced technology transfer. This is on top of a clear pattern of IP theft by the Chinese state to benefit local companies in their competition with off-shore firms.

None of this is to suggest that the Trump administration’s approach to resolving unfair Chinese trade practices will work. On the contrary, a key element in most Asian cultures is the idea of “face” and the Chinese government has to project a narrative of “winning” to its domestic audience in any trade agreement. Trump’s approach is combative and public, which makes compromise essentially impossible.

It seems that a part of the US strategy in its trade war with China is to attack Huawei — China’s leading mobile phone and mobile infrastructure manufacturer. By recently classifying Huawei as a threat to its national security, the US has brought to bear the full weight of its export control regime, which extends well beyond the US to all its trading partners, to block Huawei from trading with most Western firms. It seems unlikely that Huawei can survive this.

The Americans assert that Huawei is a threat to national security and may in future engage in spying. This is technically true, but no more so than any firm subject to the coercive power of its own government. I don’t think anyone has offered or even implied the existence of evidence that Huawei has engaged in any material acts of espionage against foreign states. On the contrary, the sort of espionage implied, using back doors in telecom equipment, is precisely what the US has been caught doing — we know this courtesy Snowden’s leaks.

In short, US worries about Huawei boil down to “these guys are dangerous because they might in future do to us the things that we’ve been doing to our adversaries for years.”

It seems likely, therefore, that the US attack on Huawei is less about security and more about attacking China’s leadership. There is ample circumstantial evidence that Huawei and powerful figures in China are closely connected. For example, consider the case of Meng Wanzhou — Huawei’s CFO currently under house arrest in Canada due to an extradition request from the Americans. China’s reaction to what would otherwise be a minor commercial squabble has been ferocious — two Canadians are arbitrarily detained in China, multiple products normally exported from Canada to China are blocked for arbitrary and unsupported reasons and even a Canadian citizen already in Chinese custody for drug offenses is retried and sentenced to death. This in addition to frequent complaints about Canadian policy by Chinese officials.

This is not a normal response by a state to what is fundamentally litigation against one of its citizens for white collar crime (Meng Wanzhou is accused essentially of an export control violation).

That China responded so strongly to this case, and that the US has tried to convince its allies to exclude Huawei from 5G infrastructure contracts and now has essentially cut off Huawei’s access to Western technology suggests that the US is trying to hurt the Chinese leadership personally, perhaps through their ownership interests in Huawei. If you poke a bee hive the bees are likely to come out and sting you, and that’s exactly what’s been happening.

The trouble with successfully hurting the Chinese leadership is that China will inevitably respond. The West needs China just as much as China needs the West. Sure, Huawei will go out of business without access to Google Services, patches to Android, access to ARM CPU designs and more, but the West needs things just as badly from China — consider rare earth metals, which are mainly sourced from China and required to make all sorts of electronics. Or large-scale assembly of computers and phones (remember where all those iPhones are made?). And China is already retaliating against agricultural products, switching to other suppliers abroad.

Trade wars hurt everyone. Hopefully the amateurs in Washington and the kleptocrats in Beijing can work something out soon!

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