An arrest ripples through global telecoms

The Canadian government has arrested Meng Wanzhou, chief financial officer of Huawei Technologies, one of China’s largest and most prominent companies. Meng was stopped because the United States had issued an extradition request based on charges that she helped Huawei avoid U.S. sanctions on trade with Iran. The detention threatens to derail the truce in the trade war between Washington and Beijing. It is also an important reminder of the role that Huawei has assumed in the telecommunications industry and the need to be sensitive to the national security implications of that profile.

Huawei is the world’s largest provider of telecommunications equipment and the second-largest manufacturer of mobile phones. It has 180,000 employees around the world and its gross revenue in 2017 topped $92 billion, making it one of the jewels among China’s high-tech companies, and proof that the country can lead in such fields.

Its size and status have allegedly encouraged a sense of impunity among Huawei executives. The U.S. departments of commerce and justice have been investigating Huawei transactions since 2016 and they have concluded that Huawei, with Meng’s approval, disregarded U.S. sanctions against Iran, and traded U.S.-origin products with the Tehran government.

As a result, Canadian authorities arrested Meng as she was changing planes in Vancouver, on her way to Latin America. The Chinese government demanded her immediate release; some in China said that the move was intended to either upend U.S.-China trade talks or demonstrate a show of force against China. The arrest occurred just before U.S. President Donald Trump met Chinese President Xi Jinping at the Group of 20 meeting to discuss their bilateral relationship and their trade war. Trump was said to have been incensed when informed — after the meal — of the arrest. A spokesperson for China’s Commerce Ministry said the arrest would not undermine the trade talks. Nevertheless, U.S. business people are worried that China might retaliate by arresting one of them during a visit to the country.

Trump’s anger creates the possibility that Meng will be used as a political pawn and that she will be released to court Xi. If the charges are valid, it is hard to imagine a more disturbing or inconsistent message. The basic U.S. complaint is that China does not separate politics from economics and allows its political system to shape the market in ways that advantage Chinese companies. Washington has called on Beijing to embrace the rule of law to stop that practice. Political intervention by the U.S. president to suspend a legal process to create economic outcomes means that the U.S. adopts the Chinese approach, rather than the reverse. U.S. credibility would be undermined.

The arrest also spotlights Huawei and its role in activities that relate to national security concerns. While the company is privately owned and insists it has no ties to the Beijing government, its founder — Meng’s father — is Ren Zhengei, who worked for more than 20 years in China’s People’s Liberation Army. Fears that those assurances are hollow has prompted several governments — the United States, Britain, Australia and New Zealand — to ban Huawei from being part of their new fifth-generation (5G) cellular networks. Those governments fear that Huawei has put back doors in their equipment which would give China access to the data crossing the network, or worse, in a crisis could disable them, effectively shutting down those countries. Britain has even gone so far as to remove Huawei equipment from its 3G and 4G networks as a result of those concerns.

Japan is reportedly thinking of banning Huawei, along with other Chinese companies, from communications equipment used by the government and the Self-Defense Forces. While Tokyo is reluctant to explicitly target Chinese companies, Chief Cabinet Secretary Yoshihide Suga said that “Cybersecurity is becoming an important issue in Japan,” adding that the government will “take firm measures looking at it from a variety of perspectives.”

This will create some difficulties for Japanese telecommunications companies like NTT Docomo and KDDI, which use Huawei technologies in its networks. Softbank has a long relationship with Huawei and has started to work with it on 5G trials. This raises the critical question of how government procurement policies can impact private investments. Given the centrality of telecommunications to modern society — a fact that become painfully clear following the Softbank service outage earlier this week — new guidelines will be required.