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Trade War

US strikes at heart of 'Made in China' with Huawei arrest

Bolton says he knew in advance, clouding trade truce

Huawei's booth at CES Asia 2018 in Shanghai, China, in June. The U.S. is blocking government-related entities from using the Chinese company's products.    © AP

BEIJING/WASHINGTON -- The arrest in Canada of Meng Wanzhou, chief financial officer of Chinese telecommunications equipment maker Huawei Technologies, on the very day that the presidents of the U.S. and China dined together augurs rough seas ahead for the Sino-American trade talks.

"The Chinese side has lodged stern representations" with both Ottawa and Washington, Ministry of Foreign Affairs spokesman Geng Shuang said in Thursday's press briefing. Beijing has demanded that they "immediately clarify the reason for the detention" and release Meng, he said.

"According to my information, neither the U.S. nor Canada has made any clarification on the reason for the detention so far," Geng said.

The arrest, which Chinese media have called a "kidnapping," disrupts the conciliatory mood thought to have been created last week at the dinner between U.S. President Donald Trump and Chinese President Xi Jinping. High-tech has immediately been thrust to the forefront of the 90-day trade negotiations.

In a development certain to enrage the Chinese, Trump National Security Adviser John Bolton told National Public Radio on Thursday that he "knew in advance" that the arrest was coming. Bolton said he did not know whether Trump knew going into the dinner with Xi.

U.S. National Security Adviser John Bolton told NPR that he knew about the attempt to arrest Huawei's Meng Wanzhou in advance.   © AP

Canadian Prime Minister Justin Trudeau told reporters that his government was not politically involved in the arrest, citing judicial independence.

"The appropriate authorities took the decisions in this case without any political involvement or interference. ... We were advised by them with a few days' notice that this was in the works," he said. "But of course there was no engagement or involvement in the political level in this decision, because we respect the independence of our judicial processes."

Reuters reported that Meng was arrested as part of a U.S. investigation of an alleged scheme to use the global banking system to evade U.S. sanctions against Iran.

For Beijing, the development serves as an unpleasant reminder of the U.S. sanctions activated against ZTE in April. The Chinese telecommunications equipment maker was in effect barred from doing business with American suppliers, blocking its access to chips and other vital components and sending it to the brink of bankruptcy. The situation was resolved in July only after a direct phone call between Xi and Trump -- and a hefty fine.

The consequences of a similar ban on Huawei could prove much more severe. The company is China's largest private enterprise by revenue, with five times ZTE's sales, and the biggest mainland-based exporter.

Huawei led the world in international patent applications last year, according to the World Intellectual Property Organization. It is the world's second-largest smartphone maker, after Samsung Electronics, recently surpassing Apple. And it is the global leader in wireless base stations, ahead of Ericsson and Nokia.

Huawei founder Ren Zhengfei's past in the People's Liberation Army has been a source of concern in many countries. Ren is said to have handled communications technology in the military before leaving to establish the company in 1987.

Meng Wanzhou is Ren's daughter. She was frequently seen at Huawei headquarters since her university days and joined the company after graduation. She rose through the ranks, mostly on the accounting team, and has been CFO since 2011. A popular figure in the company, she is widely seen as a future successor to Ren.

While tariffs have been the focus of the trade war, some in the White House insist that a trade embargo, such as a ban on parts acquisitions, would be an even more effective option.

Huawei has a key role to play in the "Made in China 2025" industrial modernization initiative, which U.S. Trade Representative Robert Lighthizer -- Washington's point man on trade talks -- seeks to scrap as the two countries vie for technological superiority.

The company is central to Chinese efforts to implement fifth-generation wireless service. 5G will be vital to such emerging fields as artificial intelligence and autonomous driving technology, and Washington sees Beijing's plans for the technology as a threat, given the potential military applications.

A bipartisan U.S. congressional advisory committee warned last month that if China takes a leading role in setting international wireless standards, Beijing will be able to collect American data much more easily. Letting Huawei's rise continue would strengthen China's military strategy and open the door to cyberattacks, it said.

The White House and Congress have taken steps to block five Chinese high-tech companies from supplying communications equipment and surveillance cameras to U.S. government entities.

The Fiscal 2019 National Defense Authorization Act which passed both houses of Congress with strong bipartisan support this summer, tightens the squeeze on not only Huawei and ZTE, but also Chinese surveillance product sellers Hangzhou Hikvision Digital Technology, Dahua Technology and Hytera Communications.

The legislation will ban U.S. government entities -- the federal government, the military, independent administrative organizations and government-owned businesses -- from procuring products from the five companies, including servers, personal computers and smartphones, or products containing components made by these companies, even if the finished products are manufactured by others.

Communications equipment made by companies other than the five but owned by or related to the Chinese government will also be banned. The names of the companies have yet to be announced.

Washington will take a second -- and stricter -- step, forbidding companies around the world from doing business with U.S. government agencies if they use products from the five companies in their offices. This policy will start on Aug. 13, 2020, and apply regardless of whether the products and services are linked to the equipment.

The second measure has greater implications for companies, given the prevalence of Chinese-made communications equipment at American government agencies and their business partners around the world. If companies that use the five manufacturers' equipment want to continue dealing with the U.S., they will have to stop using them altogether and report the move to Washington.

Major Japanese companies have already launched internal investigations to determine how many products made by Huawei and ZTE they have in their offices, and how much room they have to shift away from China in terms of their supply chains.

Huawei has deep business ties with American companies. Its semiconductor imports are roughly six times those of ZTE, including $1.8 billion from Qualcomm and $700 million from Intel. If the Trump administration imposes a ZTE-style ban on Huawei, American companies will suffer as well.

Xi's insistence on sticking with the Made in China 2025 plan stems from concern about continued reliance on foreign sources for high-tech components. China buys about 70% of its semiconductors from such markets as the U.S. and Taiwan. If Huawei is cut off from overseas suppliers of key parts, it could be forced to halt production, delivering a potentially fatal blow to the company.

Washington's renewed pressure on Huawei may prove a double-edged sword. It has abruptly driven China into a corner just as the two sides resume trade talks but could also reinforce Beijing's determination to shed its dependence on foreign technology.

Nikkei senior staff writer Tetsuro Kosaka in Tokyo contributed to this report.

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