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China and US should defuse Huawei affair

Amid global concern about Chinese tech, Xi and Trump would both profit from de-escalation

Huawei Technologies' booth features the 5G technology at a Beijing expo in September.   © Reuters

The arrest of Meng Wanzhou, chief financial officer of the Chinese tech group Huawei Technologies and daughter of the company's founder, on a U.S. extradition warrant for alleged Iran sanctions violations looks like a risky escalation in the U.S.-China trade war.

Even had it not involved a "Red Princess," Meng's detention in Canada comes at a sensitive time, just days after U.S. President Donald Trump and Xi Jinping, his Chinese counterpart, agreed a temporary truce in the conflict.

The initial response from the financial markets suggests that the risks of a breakdown in these fragile peace moves have heightened. Events could now spin things out of control with retaliatory action from Beijing. The possibility cannot be discounted that China will unleash an anti-America campaign as it did (at great economic cost) against Japan in 2012 over a maritime territorial dispute.

But there is another way to look at the current situation. The shock could increase pressures on both sides to pull back from the brink and make a trade deal more likely. That requires Beijing to recognize that its economic policies, including in tech, is generating a global backlash far beyond the White House.

If the past is any guide, Beijing may feel impelled to retaliate to what it may view as an unacceptable loss of face, seeing the Meng arrest as a politically motivated offense. But it should think twice or risk missing the larger picture.

Irrespective of Trump's blustering and the awkward timing of the arrest, there has been a global reaction against China's nationalist trade and investment practices. Xi's signature Belt and Road Initiative, a vast infrastructure program, has seen one recipient after another -- from Sri Lanka and Malaysia to the Maldives -- raise "debt trap" concerns about Chinese loans and rethinking such arrangements.

The U.S. is not alone in toughening its foreign investment laws to screen out foreign direct investment by Chinese tech groups. The EU is passing a more restrictive new law, Australia, Japan and others have become more wary and discriminating with regard to Chinese FDI in strategic sectors.

This U.S. Justice Department move against Huawei can be seen as part of a wider American campaign based on national security concerns. The IT world is gearing up for a new technology wave: the launch of 5G wireless mobile tech, up to 100 times faster than the current 4G, and the foundation of the internet of things, a new dimension of connectivity. IoT will enable smart manufacturing, smart cities and the like. But it also magnifies cybersecurity vulnerabilities.

The U.S. fears Chinese companies like Huawei and ZTE are instruments of Chinese influence, if not spying. Such suspicions are legitimate. Huawei, which now rivals Apple as a leading telecoms provider, has invested heavily in 5G and seeks to be a world leader. Washington has lobbied its allies, particularly its "Five Eyes" intelligence-sharing partners (U.K., Canada, Australia, New Zealand). All except Canada have rejected Huawei 5G technology, and there is pressure on Ottawa to join them. Japan, which plans a 5G rollout for the 2020 Olympics is also leaning in that direction. Though Portugal has signed up with Huawei for 5G, Germany and other European nations are becoming skeptical.

China's notion of "internet sovereignty," new national security laws, digital protectionism, and Made in China 2025 industrial policy blur the line between the state and the private sector.

For example, 2017 Beijing's National Intelligence Law, declares "organizations and citizens shall ... support, cooperate with, and collaborate in national intelligence work." There is already some civil-military "fusion" between Chinese Big Tech such as Alibaba, Baidu, and Tencent to meld their AI/big data capabilities with the country's armed forces.

Yet, Chinese tech companies, like their U.S. counterparts, view the world as a place to do business. They want global market access and to buy promising startups (Chinese companies have purchased some 200 U.S. Silicon Valley startups over the past five years).

So, the initial financial market response to Meng's arrest may be wrong in attaching too much importance to one drama and too little to the powerful economic forces pushing the U.S., its economy damaged by Trump tariffs, and an economically-vulnerable China toward an accord to rebalance their economic ties.

The comity at the Trump-Xi Summit during the recent Group of 20 meeting in Argentina, may reflect China's sense of economic vulnerability, and a tacit acknowledgment that Xi has vastly overplayed his hand. Trump's appointment of Robert Lighthizer, his hawkish trade representative, to head the team negotiating with Beijing, suggests the cacophony of U.S. policy voices may give way to a single point person for implementing the vague deal reached between Trump and Xi.

Beijing has apparently already agreed to increase purchases of U.S. agricultural and other goods, including, importantly, long-term purchases of natural gas. On the two other baskets of issues, market access and tech sector disputes, Beijing's intentions are more uncertain.

Xi has promised openings in the finance and other services, including permitting 100% foreign ownership. But implementation has been wanting. On tech, where the arguments encompass intellectual property rights, coerced technology transfer, subsidies and foreign market access, solutions require structural changes in China that many doubt Xi would permit.

Yet the 19th Party Congress report delivered by Xi last year emphasized that market forces would be "the decisive factor" in economic decisions. Moreover, in recent speeches, for example, last month at the Shanghai Expo, Xi repeated pledges of more "reform and opening."

There is an enormous credibility gap between such promises and actual reforms. But at least Xi's rhetoric gives him a chance of implementing change without losing face: Since Xi has advocated reform, Xi can surely implement it. He would then go a long way toward delivering the sort of reciprocity the U.S. seeks in trade policy if his own party-state bureaucracy does not pose an obstacle.

However, if the U.S. fails to expedite resolution of Meng's case, perhaps, as was done in the case of ZTE, with demands for management changes and substantial fines, it may be too politically difficult for Beijing to ignore. With a 90-day deadline on the trade talks, time is tight.

To be sure, the U.S. will get less than 100% of what it wants. But as Mick Jagger advised, "if you try sometimes, you can get what you need." Don't bet the mortgage, but a new modus vivendi in the economic relationship of the world's two largest economies and trading powers could be on the horizon.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center on International Security at the Atlantic Council and its Foresight, Strategy and Risks Initiative. He served as a senior counselor to the undersecretary of state for global affairs from 2001 to 2004, as a member of the U.S. Department of State Policy Planning Staff from 2004 to 2008, and on the National Intelligence Council Strategic Futures Group from 2008 to 2012. Twitter: @Rmanning4

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