Cyberspies, 5G and Iran: Is the US case against Huawei crumbling?

VANCOUVER, Canada -- On a Sunday night in mid-January, Canadian actor Julia Hackstaff was approached by an acquaintance offering work as an extra in a movie. The gig, which paid $100, would only take two hours. The next morning, Hackstaff joined a dozen others in the rain outside the British Columbia Supreme Court in Vancouver.

Inside, Meng Wanzhou, the chief financial officer of China's Huawei Technologies, was battling extradition to the U.S., where she would face charges of defrauding banks and breaching sanctions on Iran. Out on the street, there were protest groups calling for Huawei to leave Canada, groups supporting rights for China's Uighur minority, groups demanding the return of two Canadian citizens currently detained in Beijing.

Hackstaff's sign said "Free Ms. Meng. Equal Justice." She later said that she had been duped into joining the protests.

"When you're shooting a film or television, it's common to have to wait around. ... I kind of just thought that was the scenario," Hackstaff told the Nikkei Asian Review over the phone. "I played along for a question or two [from reporters] just thinking, this is part of it. ... But after two or three questions, like when it was very obvious that this woman was asking me details and real questions, then it clicked for me. I was like, 'Oh my gosh, this is real.'"

Hackstaff left the protest early. She never collected her $100.

As Meng Wanzhou's extradition trial began, paid actors assembled outside the courthouse bearing signs with messages of support.    © Getty Images

Huawei denied paying the demonstrators, but it was another bizarre twist in a case that has become -- and may always have been -- about far more than corporate crimes.

Meng's arrest in December 2018 at the request of the U.S. government drew Canada into the White House's increasingly bitter trade and technology "war" with Beijing. Since then, Canadian citizens have been arrested in China, highly lucrative trade arrangements have come under pressure, and the future of the country's telecoms infrastructure has been called into doubt.

With the case now dragging on into its second year, the political distance between the U.S. and its northern neighbor has grown. Meng's trial has reverberated throughout the international technology sector and crystallized global commercial and diplomatic tensions around a single company: Huawei.

"I can absolutely foresee ... a split in the market," says Amit Joshi, professor of digital strategy at IMD Business School. "Where you've got a bloc of countries that are non-Huawei, versus a bloc that are Huawei."

'No coincidence'

Meng, daughter of Huawei founder Ren Zhengfei, was arrested by the Royal Canadian Mounted Police on Dec. 1, 2018, while changing planes in Vancouver en route to Mexico. Months earlier, unknown to Huawei, a U.S. District Court in New York had issued an arrest warrant for the company's CFO. U.S. authorities claimed that Meng and Huawei had used an unofficial subsidiary, Skycom Tech, to do business with Iran in defiance of international sanctions against the country, and had moved the proceeds through the global banking system. She was charged with defrauding the financial institutions that cleared the money. If convicted, she could face decades in jail.

The charges against Meng are quite narrow, but they come against the backdrop of an escalating trade war between the world's two largest economies. As that dispute evolved, the U.S. began to focus on China's large and influential technology companies, of which Huawei is the most prominent.

China hawks in the U.S. and Australia have long alleged that Huawei has close ties to the Chinese government and military, meaning that it poses a national security threat. Over the past year, the U.S. government has added the company to its "entity list," limiting its access to high-technology components from American suppliers. Huawei has also been barred from bidding for some government contracts, and prevented from heavily subsidizing the sale of its products to rural American consumers.

Huawei responded with two separate lawsuits against the U.S. government and the Federal Communications Commission. China has matched many American tariff measures with its own restrictions on U.S. products. Both governments have gone to the breach to protect their own companies and industries.

After Meng's arrest, Canada started to draw fire. Nine days after she was detained, two Canadians, former diplomat Michael Kovrig and businessman Michael Spavor, were arrested in China and held on charges of "endangering national security." China denied the arrests were related to Meng's case, but many Canadians believe otherwise.

"There is no coincidence in China," says Guy Saint-Jacques, a former Canadian ambassador to China and a personal friend of Kovrig.

Nine days after Meng Wanzhou was detained, two Canadians were arrested in China. "There is no coincidence in China," Guy Saint-Jacques, a former Canadian ambassador there and a personal friend to one of the men arrested.   © Getty Images

Saint-Jacques pointed to China's arrest of Canadians Kevin and Julia Garratt in 2014. The pair were detained on spying charges after the U.S. requested the extradition of Su Bin, a Chinese citizen living in Vancouver, who was accused of stealing sensitive data from major U.S. defense contractors. Su pleaded guilty in March 2016. Two months later, Julia Garratt was allowed to return to Canada; her husband was released four months after that.

"I was very surprised and very sad [to hear Kovrig was detained] because I knew the kind of ordeal you would go through," says Saint-Jacques. "I knew that you would be subject to long interrogation sessions. You would be kept in the room with the lights on all day long [and] you would have no access to a lawyer. ... He has been through a very difficult ordeal."

The continued detention of the "two Michaels" has become a lightning rod for Canadian sentiment over China.

"The [extradition] hearings are not about the two Michaels, but in the public mind and the emotions of the public, the two are linked," says Paul Evans, public policy and global affairs professor at the University of British Columbia. "Over the last year, the Canadian public's anger has been getting greater and greater over this."

In October 2019, Evans led a national opinion survey in Canada. He found that China was viewed "favorably" by 29% of Canadians, down from 36% in 2017.

However, it is not only China that has suffered from plunging public support in Canada. Evans' survey found that a majority of Canadians believe Canada can no longer trust the U.S. to do the right thing in the world, and that confidence is lower in U.S. President Donald Trump than in Chinese President Xi Jinping.

Canadians are also worried that, as well as facing major diplomatic challenges, they are now being drawn into the wider economic battle between the two superpowers.

A survey run by the University of British Columbia found that, among Canadians, confidence is lower in U.S. President Donald Trump than in Chinese President Xi Jinping.   © Reuters

Before Meng's arrest, Canada had actually seen some pickup in exports to China due to the trade war. China, the world's largest buyer of soybeans, drastically reduced its imports from the U.S., sourcing instead from Canada and Brazil. Canadian soybean exports to China jumped 82% from 2017 to roughly 3.58 million tons in 2018, according to Statistics Canada.

"The situation between China and the U.S., we're impacted by that, but in some cases positively," Stewart Beck, president and CEO of Asia Pacific Foundation of Canada, told Nikkei. "We've been a beneficiary in lobsters, for an example. ... The lobster market has grown considerably in China as a result of the trade tariffs that were put on lobsters coming out of the U.S."

However, soon after Meng's arrest, Canadian agricultural exporters started to experience difficulties clearing customs in China. Canola exports were among the hardest hit. China previously accounted for 40% of Canada's canola seed exports.

"[Canadian canola growers] are very, very much impacted and feel anxious about it," said Jim Everson, president of the Canola Council of Canada. "China is a critically important market for our canola farmers. So they're very interested in an approach where we can return to predictable trade with China."

While many in Canada and internationally believe that the root of these trade issues and the arrest of the two Michaels is a direct retaliation from Beijing for the arrest of Meng, it is hard to prove that this is the case. Huawei has consistently denied having any role in Beijing's policies toward Canada.

"Huawei is in the news a lot, not always in the best way because of the global political situation. Our view is we've been dragged into President Donald Trump's trade dispute with China," said Alykhan Velshi, vice president of corporate affairs at Huawei Canada. "Ultimately, it's for the governments [and] our customers to decide whether they want to partner with us, but we're very confident in our product offering and our cybersecurity standards."

However, there is one issue that draws a direct line between Huawei and U.S. government pressure -- the rollout of Canada's fifth-generation mobile network. What role the technology giant plays in building the backbone infrastructure for 5G has become a critical issue for U.S. allies worldwide.

5G

Huawei is the world's largest supplier of telecoms equipment, making up nearly a third of the market for 2G, 3G and 4G infrastructure by the end of 2018, pulling ahead of its two main competitors, Swedish company Ericsson and Finland's Nokia.

The increasing dominance of Huawei's position, and its alleged links with the Chinese state, has long created nervousness in Western governments, most publicly in Australia. In 2012, the country's government barred Huawei from bidding for parts of the $38 billion National Broadband Network project, which aimed to connect almost all Australian homes to high-speed internet lines.

The Australian government was concerned that Huawei would be able to put in back doors that would allow the Chinese security services access to communications networks. Those fears were heightened by a law, passed in China in 2017, which required Chinese telecoms companies to assist the government in investigations relating to national security.

The following year, Australia passed a new law, the Security of Critical Infrastructure Act, which compels network operators to manage the risk of cybercrime and espionage. Although the government did not mention any companies by name in its guidance for companies, it was clear who was in focus.

"They didn't name Huawei," says Stanley Shanapinda, research fellow at the Optus La Trobe University Cyber Security Research Hub in Melbourne. "But ... everyone knew that it was targeted at Huawei."

Fears over the security of the telecoms backbone are heightened when countries are dealing with 5G. Fifth-generation networks will increase the speed of mobile data connections several times over, enabling faster, richer communication and jump-starting the development of the "internet of things."

"As things are evolving, the kinds of [communications] that will be carried on 5G will be more safety-critical, so the network itself, and the reliability and security of the network will become more important," says Tom Uren, senior analyst in the Australian Strategic Policy Institute's International Cyber Policy Center. "That's one factor that makes you think more about who's building it."

Cutting Huawei out of future networks does mitigate the risk that Chinese security services could use back doors in the company's technology -- although Australia has not presented concrete evidence that such back doors exist.

However, that security decision is heavily counterbalanced by economic arguments. Huawei is the market leader in 5G. Its technology is arguably superior to its competitors, and it has proved its ability to deploy it at scale.

Economic forecasting consultancy IHS Markit estimates that by 2035, 5G networks will generate $3.6 trillion in economic output. In 2019, research company Oxford Economics examined the potential impact of limiting open participation in 5G networks across eight countries. They found that more extreme restrictions on Huawei could delay the rollout of 5G networks, and cause a permanent loss to gross domestic product of up to $63 billion in the U.S., $11.8 billion in the U.K., $6.7 billion in Canada and $8.2 billion in Australia.

"There is an absolute trade-off," Shanapinda says.

Those economic arguments are hard to ignore. Despite strong lobbying from the U.S., the U.K. announced in late January that "high-risk vendors" would be allowed limited access to the bidding to build 5G networks -- a decision that Republican Sen. Tom Cotton called "like allowing the KGB to build its telephone network during the Cold War."

The U.K. has entered a precarious position in world affairs since its exit from the European Union, causing it to tread a fine line to avoid infuriating two countries with which it will be seeking trade deals.

Canada, which is yet to make its own decision on its 5G infrastructure networks, will have to strike a similar balance. The U.S. accounts for 75% of Canada's goods exports, and the two countries last month signed -- but have not ratified -- a new trade deal, after the Trump administration unilaterally declared that it would renegotiate the terms of the 1994 North American Free Trade Agreement.

"The U.S. is a traditional ally. ... Of course, the relationship is complicated by the person in the White House," Saint-Jacques says. "I think that the renegotiation of the free trade agreement between Canada and Mexico and the U.S. is a force [for governments] to refrain from doing anything that would make President Donald Trump angry."

Despite security concerns, Huawei is the market leader in 5G. Its technology is arguably superior to its competitors, and it has proved its ability to deploy it at scale.   © Getty Images

The Chinese telecom giant has sold equipment to all three major carriers in Canada -- Rogers Communications, BCE and Telus -- as well as several smaller ones.

The Asia Pacific Foundation of Canada's Beck said he hoped the decision would be made on its technical merits alone.

"I would hope that whatever decision is taken is [made] by subject matter experts who know and understand the technology and its impact, and whether or not it creates the issues that certainly the Americans have been saying [that] it does," he said.

Huawei has countered the pressure from American authorities with a charm offensive, spending big on lobbying -- nearly $3 million in 2019 in the U.S., according to federal documents, including roughly $1.7 million paid to Michael Esposito, a lobbyist who claimed to have deep Republican ties and was a former fundraiser for Trump.

In Canada, the company has emphasized its investments in the high-technology sector. Although Canada is a very small market relative to the U.S., the company employs 1,200 staff, 80% of whom work in research and development, according to Huawei's Velshi. In December, Huawei founder Ren said that the company would relocate its U.S. R&D center to Canada.

"Most North Americans don't know [that] the early research and development work into 5G actually happened here in Canada, in our R&D center in Ottawa," Velshi told Nikkei. "That's why Canada is one of the big R&D hubs for Huawei."

Last year, the company spent almost $200 million on research in Canada, he added, making it one of the top 25 private sector funders of R&D. "And it's growing," he said. "That's a lot of money into the Canadian R&D ecosystem."

In the U.K., Huawei opened a 5G research center in London just over a month before the government's decision on its inclusion in public networks was announced.

How effective this charm offensive will be is unclear. Even without the U.S.' aggressive lobbying, countries do have real concerns about Huawei's closeness to the Chinese government that are not easily dismissed.

"As long as they are attached to the hip to the Chinese government at some level, there will always be a suspicion," IMD's Joshi said. "And even if there's not a suspicion, there will always be a reason for right-wing governments to clamp down on them."

Canada in the cold

Meng's hearing in January was held inside Courtroom 20 -- a bulletproof glass room built specifically for high-profile trials, first used in the 1985 trial of suspects in the bombing of Air India Flight 182. Meng sat quietly with her translator, behind her lawyers. Wearing a black dress with white polka dots, stiletto heels and a GPS-monitoring ankle bracelet, she looked worried throughout.

The hearing focused on whether the case meets the standard of "double criminality" -- the charges against her need to be considered criminal in both the U.S. and Canada for her to be extradited. The Crown Counsel argued that since wire and bank fraud are crimes in both countries, the extradition order is valid. Meng's lawyers contend the case centers on the violation of U.S. sanctions, which are not law in Canada.

A decision on that is unlikely to come until March at the earliest. Whatever that decision is, and the terms on which it is made, it will inevitably be politicized by the many issues swirling around the trial.

"It's really an interesting time because we have three Huawei issues in the public mind that are all happening at the same time," said UBC's Evans.

Huawei's sprawling research and development campus in Dongguan near Shenzhen.   © Getty Images

That is even further complicated by the case's link to Iran, and a tragedy that many Canadians associate with the Trump administration. In January, the U.S. assassinated a senior Iranian intelligence official, Gen. Qassem Soleimani. Amid the heightened tensions following his killing, Iranian forces accidentally shot down a Ukrainian passenger jet, killing all 176 passengers and crew aboard, including at least 63 Canadians.

"The Canadian public understands that the acceleration of tension caused by the killing of this major general led to a chain of events, which led to the downing of the plane," said Yves Tiberghien, politics professor at the University of British Columbia. "That is the general mood. The Canadian public is not very happy with the U.S. [and] Trump."

The building sense of grievance has not been helped by the White House's apparent indifference to Canada's position in the trade war. In December, Canadian Prime Minister Justin Trudeau asked President Trump not to sign a trade deal with China without including the release of the detained Canadians. In January, Trump triumphantly signed a "phase one" trade deal with Beijing, marking a tentative de-escalation in the trade war. Michael Kovrig and Michael Spavor remain in custody.

This has only added to a concern in Canada that, having pulled its neighbor and ally into a conflict of its own making, the U.S. now intends to only look after itself. If that is the case, then Canada has little to gain by toeing the White House's line.

"If the U.S. really warms up with China in terms of bilateral relationship, I think Canada is going to be left further in the cold," says Lynette Ong, associate professor of politics at the University of Toronto. "We got into this and we suffered the consequence, with two Canadians being detained, and then you guys went ahead and signed a trade deal and left Canada behind."