CANADA’S DECISION TO ban Huawei and ZTE from providing equipment for the country’s 5G network suggests that flesh is, at last, being put on the bones of the comprehensive new approach to China that Prime Minister Justin Trudeau has been promising since last year.
Nor can it be a coincidence, this Bystander suspects, that the announcement comes in the wake of the United States preparing sanctions against Hikvision and ahead of US President Joe Biden’s trip to US allies in Asia, where he will unveil the United States’ long-awaited Indo Pacific Economic Framework.
Canada’s decision brings Ottowa in line with the other members of the ‘Five Eyes’ intelligence-sharing community (the United States, United Kingdom, Australia and New Zealand).
The decision to ban Huawei and ZTE had been expected once China freed two Canadian citizens last September who had been ensnared in the diplomatic row caused by Ottawa acceding to a request from Washington to detain Huawei’s CFO, Meng Wanzhou, on suspicion of sanctions evasion.
Concerns among Canadia’s telecom operators about the extent of re-equipping that the bans will make necessary may have caused the subsequent delay. They will now have two years to remove any 5G equipment from the two Chinese companies already installed and five years to replace any used for current 4G service. However, there will be no government money to do so.
Beijing’s response has been boilerplate, accusing Ottowa of political manipulation and colluding with Washington. The Chinese embassy in Ottowa said in a statement:
China will comprehensively and seriously evaluate this incident and take all necessary measures to safeguard the legitimate rights and interests of Chinese companies.
That suggests some foot-stamping but likely little if any material retaliation.
CHINA’S POSITION ON the return of Huawei’s CFO Meng Wanzhou after nearly three year’s detention in Canada fighting an extradition request to face criminal fraud charges in the United States is clear: it has won a complete victory.
US Department of Justice prosecutors announced a deferred prosecution agreement on Friday under which Meng admitted misleading HSBC into processing transactions for Huawei that breached sanctions against Iran. In return, her prosecution on bank and wire fraud charges, to which she pleads not guilty, halts and the charges will be formally dropped by the end of next year if she complies with the agreement.
The extradition request against her thus became moot and was withdrawn. Meng was immediately released by the Canadians and boarded a plane chartered by the Chinese government to take her home to Shenzhen, posting to WeChat en route:
I am currently flying over the North Pole, heading in the direction of home, soon to enter the embrace of our great motherland. Under the leadership of the Chinese Communist party, our motherland is heading toward prosperity. If it was not for our strong motherland, we would not have the freedoms of today.
She did not mention what the one senior FBI official described as her admission as ‘evidence of a consistent pattern of deception to violate US law.’ All search results on Weibo relating to her admission of misleading HSBC are reportedly being blocked.
Foreign Ministry spokesperson Hua Chunying said:
Facts have proven that it is a political persecution case targeting a Chinese national with the aim of suppressing Chinese high-tech companies…The so-called fraud charges against Meng are nothing but pure fabrication…What the United States and Canada have done is a typical case of arbitrary detention.
It is the mirror image of the view Canadians will have of the detention of ‘the two Michaels‘, two Canadian nationals detained in China on espionage charges shortly after Meng’s arrest in Canada and released soon after her release on Friday.
Michael Spavor, who ran cultural exchanges with North Korea, was jailed for 11 years in August after being found guilty. The case of Michael Kovrig, a former diplomat, was still before the courts.
Throughout, authorities have maintained that the two cases were not connected with Meng’s while occasionally linking the two indirectly. However, the two Canadians were widely regarded in the West as diplomatic hostages in the Meng case.
While Canada has got its two citizens returned home, it is more difficult to see what the United States has gained. The US Department of Justices has published the deferred prosecution agreement, but there may be more unreleased detail concerning it to come out or even a secret side-deal.
We do know from reading the agreement that the deal requires Meng to refrain from saying anything that contradicts US prosecutors’ stated facts about the case, which are laid out in a four-page appendix to the agreement. This in a nutshell says that in a 2013 presentation to ‘financial institution 1’, Meng misrepresented the relationship between Huawei and Skycom, which operated in Iran, as a business partnership when in fact Huawei controlled Skycom. This caused the bank to provide banking services, that broke US sanctions against Iran.
However, any hopes that Meng’s release will ease strained US-China tensions to any significant degree appear optimistic.
True, Meng’s case was a particular and personalised irritant in bilateral relations because she was the daughter of Huawei’s founder Ren Zhengfei. Nonetheless, a larger US racketeering indictment against Huawei will continue, bolstered by Meng’s admissions in the agreement.
The company says it will defend itself against vigorously, and US-China relations remain fraught, the more so, the more triumphant the reaction in China to Meng’s return.
In that light and at this point pending the revelation of more quid pro quos, the outcome to Meng’s case seems a big win for China, a moderate success for Canada and not much of anything at all for the United States. However, we suspect the other half of the story is still to be told.
LITHUANIA KNOWS A thing or two about standing up to large Communist states. It also has previous with China, most recently over the naming of Taipei’s representative office in Vilnius as Taiwan’s, which led to Beijing demanding Vilnius recall its ambassador.
Thus the exhortation this week by its defence ministry to Lithuanians to throw away their Chinese smartphones and not buy new ones fits a pattern.
The advice followed a cybersecurity analysis by the ministry’s National Cyber Security Centre (NCSC) of three 5G-enabled smartphones introduced into the Lithuanian market last year and seen in the screenshot above. There is one each from Huawei, Xiaomi and OnePlus, a brand of BBK Electronics that also owns the Oppo and Vivo brands.
The NCSC found that:
Huawei’s official app gallery directs users to third-party online stores that sell malicious or virus-infected apps, raising data breach risks;
all three devices routed user data through servers based in third countries such as Singapore that are not covered by the EU’s General Data Protection Regulation and are Chinese company-owned, meaning the data would have to be turned over to Chinese authorities on request; and
Xiaomi’s smartphones have a built-in censorship feature, which it says is deactivated in Europe but, the NCSC says, can be activated remotely.
Each device uses a variant of Google’s Android operating system.
Huawei says no user data is sent externally and Xiaomi that it does not censor communications. However, the NCSC’s findings will confirm the mounting fears in Western countries that Beijing is using the commercial prowess of its technology companies to advance the deployment of its growing cyber capabilities, particularly for espionage and data gathering.
The NCSC will release further findings by the end of the year, likely intensifying the European backlash against Chinese hardware.
THE TRUMP ADMINISTRATION has moved to close the remaining loopholes through which Huawei Technologies has been able to acquire US-made semiconductors.
This provides something more akin to a knock-out punch than any blow the administration has landed on Huawei to date. Its goal is to sink Huawei’s smartphone and 5G businesses to their knees. Together they generate 90% of the telecom giant’s revenue.
With its latest measures, the US administration has, in short, rewritten its export control laws by expanding the Foreign Direct Product Rule. Now, not only can Huawei not buy US-made chips but cannot buy chips made by non-US firms that have been developed or produced with US technology, including software.
There was a milder, throat clearing version of this in May, which the China hawks in the administration say gave Huawei scope to go through third parties. In addition, a further 38 Huawei affiliates in 21 countries have been added to the Entity List, taking the total to 152 affiliates since Huawei was first included in May 2019.
The list is the US government’s economic blacklist of companies that need a special licence to do business with US firms; a temporary general licence for Huawei, intended to give its US customers time to transition from Huawei kit, expired last week.
Asian, European and even domestic Chinese chipmakers will now have to pick sides. Sharp falls today in the share prices of some of Huawei’s non-US suppliers provide a pointer to how painful that choice may prove to be.
With the latest blow to Huawei, China can be less confident of dominating 5G than it once looked set to be.
However, the new measures also raise business and compliance costs for all technology companies. They will need to monitor the full-length of their value chains from development to the final sale to end-user. For the increasingly active China-hawks in the White House, that will be the cost of collateral damage.
The outstanding question is whether Beijing will back off its recent restraint in the face of their provocations and unleash meaningful retaliation against US companies operating in China.
THE UNITED KINGDOM has fallen into line with the United States in excluding Huawei Technologies from its 5G network. The government announced today that domestic telecoms providers would have to stop buying new Huawei kit by the end of this year and remove existing equipment from their 5G networks by 2027.
The new policy does not apply to Huawei kit in 2G, 3G and 4G networks. Oliver Dowden, the Digital Secretary, told parliament that its latest decision would delay the UK’s roll-out of 5G by more than a year and add millions of pounds to its cost. (Update: UK officials now pegging cost at up to £2 billion ($2.5 billion) and delay at two to three years.)
After a review in January, the United Kingdom previously decided that Huawei could remain in non-core parts of the country’s network but capped at a 35% market share. This was in effect taking a line that the national security risk of Chinese equipment on the UK network could be mitigated.
The government has reversed that view, accepting Washington’s position that telecoms equipment that cannot be trusted is a national security threat to be beaten, and that mitigation cannot work. The UK U-turn follows May’s US sanctions designed to disrupt Huawei’s ability to get its chips manufactured. Concerns over Huawei’s supply chain reliability as much as Washington’s diplomatic pressure, intense as it has been, seem to have weighed in London’s latest decision — or at least in its presentation of it.
Other political factors in play are growing belligerence among UK lawmakers — particularly those from UK prime minister Boris Johnson’s Conservative Party — and across Europe about inbound Chinese investment and influence, the United Kingdom’s need for a post-Brexit trade deal with the United States and the increasingly fractious relationship between London and Beijing over both the Covid-19 pandemic and Hong Kong.
Excluding Huawei from the United Kingdom gives Beijing one less reason to go easy on Hong Kong following the imposition of its national security law.
Nonetheless, London’s decision is being lauded in Washington, which was infuriated by the January review, and welcomed in Brussels. Our man in Washington sends word that officials in the administration are expecting the United Kingdom’s change of heart to resonate among other Western nations.
It is likely to be greeted with annoyance in Beijing, however, and taken as further confirmation of the United Kingdom operates as an arm of US foreign policy (hence the United Kingdom’s emphasis on the supply chain security element to its decision). London will be on alert for retaliatory measures from China in what will inevitably be a period of tense relations between the two.
Separately, Lord Browne, the former head of BP, who had been hired by Huawei five years ago to provide a respected and well-connected face at the head of its UK operations, has said he will be stepping down early as Huawei UK’s chairman. He will leave the company in September.
THERE ARE FEW surprises if any among the list of 20 companies released by the US Department of Defence that it says have ties to the People’s Liberation Army. It comprises defence contractors such as Aviation Industry Corporation of China (AVIC), telecoms companies such as the much-sanctioned Huawei Technologies and surveillance equipment producers such as Hikvision. More companies are likely to be added in future.
The US Congress first required the Pentagon to produce the list more than two decades ago. It is only with the advent of the Trump administration that the request has been acted on, or possibly that the list has been made public.
The overt reason for it is to detect supply-chain vulnerabilities in US weapons production. Under the International Emergency Economic Powers Act of 1977, the president has the power to level financial and trade sanctions against any company on the list. He can also choose not to do so, as he has so far done with his sanctions powers granted by the Uyghur Human Rights Policy Act of 2020.
More likely, the new list will be used to exclude the named companies from US government procurement tenders. The Pentagon is particularly concerned about advanced semiconductors and integrated circuits since both are critical for weapons systems, and have the obvious consequences if compromised. The same concerns are growing around artificial intelligence and cloud computing, both of which are at the heart of info- and cyberwarfare. Inspur, a big-data and cloud computing group, is on the list, as is Dawning Information Industry Co., known as Sugon, which Washington blacklisted last year for selling supercomputers to the PLA for nuclear weapons research.
Naming and shaming also fit squarely into the president’s efforts to deny Beijing access to US technology to slow its economic and military development. Similar to the Entities List, the new military list will let Washington use existing export control licences to hinder Chinese companies’ ability to buy US tech components. In April, for example, it changed the rules for granting such licences by expanding the definition of a military end-user to include the civilian supply chain, a direct strike at Beijing’s military-civil fusion strategy.
TO LITTLE SURPRISE in these febrile times for China-US relations, US Secretary of State Mike Pompeo has declared that Hong Kong has lost its autonomy from China, and thus put at risk the city’s preferential trade treatment by the United States.
Last year, the US Congress passed legislation that requires the US State Department to certify annually that the city remains autonomous. In a statement, Pompeo said:
After careful study of developments over the reporting period, I certified to Congress today that Hong Kong does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997. No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.
The statement comes hard on the heels of Beijing’s announced intention to write a new national security law into Hong Kong’s Basic Law, an intent that has brought hundreds of Hongkonger’s onto the streets in protest. There, they have been met with tear gas, pepper spray and police baton charges.
The State Department announcement paves the way for a range of punitive options for the Trump administration, from asset freezes and travel restrictions for top officials to US President Donald Trump’s favoured sanction of tariffs on Hong Kong exports. The president has promised an indication by week’s end of what he will do.
Foreign ministry spokesman Zhao Lijian has repeated the standard line that the national security law for Hong Kong is an internal affair for which it will brook no foreign interference, and warned that “if anyone insists on harming China’s interests, China is determined to take all necessary countermeasures”.
As this Bystander has noted previously, commerce and capital are going to have to choose sides over Hong Kong.
Meanwhile, the British Colombia Supreme Court in Vancouver has ruled that an extradition request by Washington for Meng Wanzhou, Huawei Technologies’ chief financial officer and the daughter of the company’s founder, can proceed. Meng faces fraud charges in the United States in connection with alleged violations of US sanctions against Iran.
This is far from the end of the matter. A hearing is scheduled for next month on whether Canadian officials acted lawfully while arresting Meng. Even if a Canadian court eventually recommends extradition, which has already cast a dark shadow over relations between Beijing and Ottawa, it will be Canada’s federal justice minister who will take the ultimate decision whether or not to hand Meng over for trial in the United States.
Update: On May 28, the National People’s Congress formally approved the proposal for Beijing to impose a national security law on Hong Kong,
THE UNITED STATES may have become suddenly gripped by the Covid-19 pandemic, but there is no loosening of its tech contestation with China.
Telecom group ZTE Corp. is under investigation by the US Justice Department for allegedly bribing foreign officials to gain advantages in the world telecom market, according to US media. Authorities have declined to comment on the reports; the company has said that it is ‘fully committed to meeting its legal and compliance obligations’.
Three years ago, ZTE paid $1.2 billion to settle charges that it had violated US export controls and pleaded guilty to shipping equipment from the United States to Iran. The following year, a US judge ordered a further two years of court monitoring of the company after determining that ZTE had not taken the corrective steps agreed in the 2017 settlement.
The reports of ZTE’s alleged infractions come hard on US President Donald Trump signing into law on March 12 a ban on telecoms carriers operating in the United States from buying network equipment from ZTE, Huawei Technologies and other companies ‘deemed a national security threat’.
The law also authorises funding for smaller carriers, usually serving rural communities, to strip out and replace equipment already bought from such suppliers. Sustaining service to rural America (and by extension a bedrock sector of his political base) is a priority for the president in this election year.
On March 11, the Trump administration extended to May 15 the temporary licenses due to expire on April 1 that allow some US firms to keep doing business with Chinese tech firms, despite Huawei being added to the administration’s trade blacklist in May. The extension cited the need for rural carriers to be able to continue to service customers in some of the most remote areas of the United States.
The US Commerce Department has also sought public comments on whether there should be future extensions, typically a prelude for future rulemaking, likely in this case to be an ending of the licences.
THE UNITED KINGDOM’S renowned ability to muddle through the middle is being put to the test. The Johnson government’s decision to allow Huawei a continuing role in developing the United Kingdom’s 5G networks is a case in point.
Beijing threatened repercussions on China’s trade and investment with the United Kingdom if Huawei was excluded. Washington threatened to cut off intelligence sharing with London if it was not.
The Trump administration is pursuing a global campaign against the telecoms giant which it accuses of spying for China, a charge the company denies. That campaign is a pivotal battle of the Trump administration’s technology war with China.
With Brexit barely hours away and the United Kingdom needing future trading relationships with both of the world’s two largest economies, wiggling along the fence bottom down and damn the splinters was Prime Minister Boris Johnson’s only option. It is a discomfort that will be familiar to US allies that are China’s regional neighbours.
Hence the Shenzhen-based telecoms giant will be allowed up to a 35% share of the UK 5G network’s periphery, i.e., the radio access network, but be banned from the most sensitive part, the core, and excluded altogether from areas near military bases and nuclear sites.
The 35% cap also applies to the rollout of the UK’s fibre broadband network, for which Huawei already has a 45% share. Similarly, the company currently exceeds the 35% cap in two of the three of the four UK mobile networks that deploy Huawei kit.
The government’s decision still needs the UK parliament’s approval. Voices in Washington are urging backbench MPs to oppose it for the sake of preserving the special relationship between the United Kingdom and the United States. They will also argue, correctly, that the core and the periphery of 5G networks are converging, so even periphery access now is a (not so) long-term security threat.
The Trump administration already regards the United Kingdom as an unreliable ally for moves such as joining Beijing’s Belt and Road-linked Asia Infrastructure Investment Bank against Washington’s wishes and for generally being more accommodating to China than it likes — although the Trump administration’s default view is that any ally that does not fall entirely in line with its wishes is unreliable. As the president had made calls to Johnson ahead of the Huawei decision, his next reaction is reliably likely to be petulant.
While the 5G decision will be as irritating to China as it is the United States, for Huawei, the win, in so far as it is not a defeat, comes as the Trump administration is seeking to bolster its barriers against the company gaining access to US technology. Washington has leaned heavily on its allies, although only with any success with Australia, New Zealand and to an extent Japan. European nations and the EU, bracing for a trade assault from the Trump administration, have been less accommodating.
Commerce Secretary Wilbur Ross says tighter restrictions are coming Huawei’s way. However, US reports have said that a proposal to further restrict US companies from selling computer chips and other components to the company, including for the first time via their overseas subsidiaries, has been delayed.
The defence establishment is concerned that the move would accelerate China’s drive to develop indigenous technology. At the same time, the lost sales by US firms could cut into their research and development spending, at the risk of blunting US military technological superiority.
On another front, court proceedings are underway in Canada to have Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, extradited to the United States to stand trial on fraud charges connected to alleged busting of sanctions on Iran. Meng denies the allegations, and the case could take years to resolve.
Prosecutors say Meng’s case is separate from the broader trade dispute between the United States and China. However, the inverse is true. The trade dispute is only a part of the more existential confrontation between Washington and Beijing for technological leadership in which the United Kingdom finds itself uncomfortably caught in the middle.
ANY FLEETING GOODWILL between Beijing and Washington generated by the signing of the phase one economic and trade agreement earlier this week is likely to evaporate early next week when a court in Vancouver opens an extradition hearing for Huawei’s chief financial officer Meng Wanzhou.
The United States wants to bring her to stand trial on charges of bank fraud in connection with allegations that she lied to HSBC about her company’s operations in Iran. Meng denies the allegation and is fighting the extradition attempt.
US Treasury Secretary Steven Mnuchin was at pains this week to underline how the Trump administration wanted to separate its trade and what he called national security issues with China. However, the message from President Xi Jinping read out at the signing ceremony calling for fair treatment for Chinese companies suggests that Beijing sees them of a piece.
There is little sign of the US campaign against the telecoms giant easing off. If anything, it is ramping up the pressure on allies to exclude Huawei from their 5G networks and is reportedly considering tighter restrictions on what US companies can sell to the firm.