Future Tense

What the Huawei Executive’s Arrest Could Mean for the U.S.-China Trade War

One key question it raises: What are the limits of American coercion?

Meng Wanzhou
Meng Wanzhou, the CFO of Chinese technology giant Huawei who was arrested in Dec. 1, in Moscow on Oct. 2, 2014. Reuters/Alexander Bibik

The world learned Wednesday night that on Dec. 1, Canadian authorities arrested Meng Wanzhou—the chief financial officer at Chinese electronics giant Huawei—over allegations that the company violated American sanctions on Iran. The timing of the arrest is very charged, and the stakes of the case are extremely high.

Huawei is one of China’s largest tech companies, and Meng is the daughter of its founder. She faces extradition to the United States while a 90-day clock is ticking on wide-ranging negotiations between the U.S. and China that, if fruitful, could reshape the two countries’ globally vital trade relationship.

Whether intentionally or not, the arrest came on the same day that U.S. President Donald Trump and Chinese President Xi Jinping met at the G-20 in Buenos Aires, Argentina. Following their dinner, the two governments announced a 90-day round of talks, during which the U.S. would pause planned tariff increases against China.

Although the two sides differed considerably in how they described the agreement, reports and markets were initially optimistic that the nations’ so-called trade war had entered a truce. The Trump administration had downplayed the potential for any deal during the meeting, and this announcement was the first strong signal of restraint in America’s escalating pressure campaign against Chinese trade, market access, and intellectual property practices.

Then, after Trump on Twitter dubbed himself “Tariff Man,” market optimism seemed to deflate. And when markets opened after news of Meng’s arrest, they dipped further downward.

There are crucial unknowns about Meng’s arrest and America’s associated efforts against Huawei, but this development will certainly complicate U.S. efforts to coerce Chinese officials to capitulate to American demands and to abandon a development strategy that champions the Asian country’s independent technological capabilities. Below are some of the case’s most salient remaining questions and its most important likely consequences.

1. Was the Huawei arrest designed to increase pressure on China during the tariff negotiations?

News of Meng’s arrest did not emerge for four days, but did Trump know during dinner with Xi that Canadian police were acting against a Huawei executive at the Americans’ behest? Thursday night, the White House said that the president did not know before the meal. But meanwhile, national security adviser John Bolton told NPR that he knew the arrest was coming in advance.

If Trump knowingly took action on an issue the Chinese government regards as sensitive during a bilateral meeting, it wouldn’t be the first time he’s done it. At the leaders’ first dinner in 2017, at Trump’s Florida resort, the U.S. president surprised his Chinese counterpart with news that American forces had attacked targets in Syria. China’s government had sided with Russia in supporting Syrian leader Bashar al-Assad, and Trump’s revelation led Chinese commentators to speculate that the administration wanted to make its threats against North Korea more credible.

It is entirely possible that the U.S. case against Meng developed on its own time scale over years of investigation into alleged sanctions violations. Without knowing when the United States asked Canada for its help, or when authorities learned of Meng’s travel to Canada, it is hard to nail down whether the timing was a coincidence or a message.

What seems clear is that U.S. law enforcement authorities were not restrained from acting at such a sensitive time. It’s less clear what happens next. If Meng is successfully extradited to the United States, CNN reported that an administration source said she “could be used as leverage with China in trade talks.” This may never happen, but if it does, it would be an extraordinary breach of diplomatic convention, and one that would pose retaliatory risks for thousands of Americans working in China.

2. This arrest follows a near-total shutdown of Huawei’s Chinese competitor ZTE over sanctions violations. What does ZTE’s treatment tell us about U.S. efforts against Huawei ?

U.S. scrutiny of Huawei goes back at least to 2012, when a congressional committee report identified the company, along with its smaller rival ZTE, as a risk to U.S. national security. The two companies “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems,” the report said.

More recently, U.S. and other governments have scrutinized the role Huawei might play in next-generation 5G wireless infrastructure, which requires new technology and a lot of new hardware. Australia, New Zealand, and British Telecom have gone so far as to explicitly ban Huawei from their 5G build-outs.

Getting shut out of markets is one thing. Earlier this year, however, in a related sanctions case, ZTE faced the real possibility of total shutdown. ZTE admitted in a 2017 settlement that it had violated sanctions by providing technology containing U.S. content to customers in Iran and North Korea. After the U.S. Commerce Department found, in a damning court filing, that ZTE had violated the settlement agreement, the government announced that it would impose a previously suspended penalty.

That penalty, called a “denial order,” would cut off ZTE from U.S. components, including semiconductors crucial to a wide array of the company’s products. The announcement threw the company into shambles, causing it to cease “major operation activities.” Only an intervention by Trump, after speaking with Xi, allowed the company to survive.

The Huawei case is connected. ZTE documents unearthed in the U.S. investigation referred to a competing company they called “F7” as an example of how a company could arrange transactions to evade sanctions enforcement. Many believed F7 referred to Huawei.

The U.S. action against an individual Huawei executive is different from a sanctions case against the company, but the memory of the ZTE case is fresh, and it is at least conceivable that the U.S. government would seek to threaten Huawei with a similar denial order.

Huawei—a much larger company than ZTE and one with growing efforts to develop its own semiconductors and other core technologies instead of buying them from abroad—might not be forced to shut down by a denial order. But such an order would be dramatic and damaging for the company.

3. No question: U.S. determination to undermine Huawei will strengthen China’s efforts to develop independent “core technology.”

For Chinese strategists, the ZTE case was a clarifying moment.

Authorities had long sought to make Chinese computer systems more “secure and controllable.” Edward Snowden’s 2013 revelations about NSA surveillance galvanized concerns that Chinese use of American tech products could be an advantage for U.S. spies.

In 2018, the denial order against ZTE made clear that the U.S. government was not merely wielding tariffs but was also willing to use sanctions power in a way that would destroy a major Chinese company. In April, when ZTE’s fate was uncertain, Xi gave a speech in which he underlined the importance of “construction of China as a cyber superpower through indigenous innovation.” As our DigiChina project at New America reported, Xi’s emphasis on independent capabilities in “core technologies” echoed a speech he gave at a similar occasion two years earlier.

“Core technologies” refers to things like semiconductors, operating systems, and foundational A.I. algorithms without which no country can thrive at the leading edge of technological development—and Huawei and ZTE are two major developers of such capabilities. U.S. government threats to cut key firms off from these “core” components made China’s perceived need to develop solutions without U.S. dependencies very clear.

Though the technologies at issue have changed, the conflict has historical echoes, and Xi has seized upon them. In an April speech, he recalled China’s rhetoric and practice of “self-reliance” during past blockades. Chinese people, he said, had “tightened their belts” and “grit their teeth,” eventually succeeding in developing nuclear weapons and missile programs back in the 1960s.

4. What are the limits of American coercion?

The Trump administration’s economic policies toward China are designed to address long-standing U.S. grievances. Whether it’s China failing to live up to expectations following acceptance into the WTO in 2001, blocking American firms from major sectors in China, or wrenching intellectual property from foreign companies through joint ventures or outright theft, stubborn trade-related frictions long predate Trump.

What has changed is a turn from negotiations, quiet advocacy, and name-and-shame tactics to measures designed to be coercive, most prominently through an escalating tariff program. Though key administration figures have often disagreed (and often in full view of their Chinese counterparts), the broad Trump administration consensus is that the United States can exert enough pain on China economically and diplomatically that it will relent and accede to U.S.

But this economic-coercion campaign comes alongside an emerging rivalry over security and geopolitics, one resulting from several factors: for instance, China’s brazen violation of international law in the South China Sea, efforts on both sides to build military advantages over the other, and Chinese policies abroad that at times appear designed to make the world safer for authoritarianism, all amid alarming human rights abuses against Muslims in northwest China. This dynamic is not predestined to escalate, but it is not clear how to stop it—especially given the volatile state of American politics.

However the Trump administration fares in coercing Chinese concessions, it is all but certain that tariffs will not quash Chinese government efforts to free their country from foreign government leverage over its technological supply lines.

Whether the U.S. is targeting Huawei for legitimate and laudable law enforcement goals or over murky national security suspicions, the administration must know that doing this targeting will make the company even more important to its champions in Beijing. With the stakes heightened by a turn to coercion and a public test of wills, some concessions from China become ever more unlikely.