Now that the U.S. House of Representative investigative report by Chairman Mike Rogers and Ranking Member C.A. Dutch Ruppersberger of the Permanent Select Committee on Intelligence regarding Huawei and ZTE is out, there is a lot of chatter in the U.S. media. I thought Paula Dwyer of Bloomberg summarized this whole affair the best:
What the report lacks is evidence. It also smacks of protectionism, despite denials by the committee chairman, Michigan Republican Mike Rogers, that he is invoking national security to shield U.S. telecoms equipment companies from Chinese competition.
I would go further to say that China could easily accuse American companies of potentially spying for the U.S. government. How is GM to prove that they don’t bug the cars they make in China? What about Microsoft Windows containing spyware to steal sensitive data? How about genetically modified food that may have negative effects in the long run which American corporations are not telling? Can Apple prove that its iPhone is safe? Hence, evidence is important. Why doesn’t China block Cisco products? Chinese society benefits from greater competition! To block Cisco would be easy. The irony is of course GM is selling more cars in China now than in America (as Rogers is from the state of Michigan where GM is headquartered).
As Justin Knapp puts it, “protectionism does not equal patriotism,” and America would be stronger, as he suggests, to embrace competition rather than hiding from it.
William says
Kaiser Kuo and Sinica did an excellent podcast on this very issue, from which I learn just how vague, irrational and extensive (and unfulfillable) the House’s questions and requirements were. I encourage all to take a listen to the full thing:
download the audio file
subscribe to the feed
pug_ster says
The problem with Huawei and ZTE is that both companies are incrediably successful. These companies are breathing down the necks of Siemens, Erisson, and Alactel. In 60 minutes show, when the US government found out a small wireless company, United Wireless, is using Huawei 4g equipment, they got a visit from them. Shows the kind of ridiciousness of the US government to keep them away and the exact reason why our wireless bills are so high compared to other countries.
Zack says
@pug_ster
indeed, this whole Huawei/ZTE charade ought to put paid the myth that America of today embraces free market capitalism. Bullshit it does.
question is, how much longer are they going to pull this ‘sinophobia’ thing before it rears its head and bites them on the arse?
Zack says
i do believe China now has legitimate grounds to take the US to the WTO for protectionist and discriminatory measures; after all, the House report doesn’t even specify any alleged threat and merely parrots what we already know about Huawei and ZTE-that Huawei’s CEO is ex PLA etc etc as if Cisco or Boeing or the like never had ex-military personnel.
no-name says
The very openly hostile US stance towards Huawei (and others like ZTE) betrays the general American outlook towards China a country which is considered as the numero uno foe for the US come tomorrow. Read http://www.scribd.com/doc/109563105 for a brief description of US intent.
Ray says
Who said McCarthyism is over in the west? To top it off we now have issues of trade. Trade conflict between allies even in the best of time is tricky Boeing vs Airbus ; Microsoft, Intel being fined in European court; the fabricated brake issues in Toyota vehicles etc.
Sadly, the only way for China to redress this trade protectionism is to retaliate in other trade measure. Is this a race towards the bottom?
As for Huawei and ZTE, their only way out is to be even more competitive and innovative.
Zack says
seems like there’s some sort of anglocentric co-ordination going on here now that Canada’s rumbling about banning Huawei and Australia banning Huawei back in March. And to top it off, the protectionist Americans have now slapped tariffs on Chinese solar companies.
good god, do the Americans really believe a trade war is going to solve American problems?
Zack says
y’know what; the more the American gov. nakedly target China, the more Chinese companies continue giving them the middle finger. This just in, Lenovo overtook HP as the world’s leading PC maker.
http://english.cntv.cn/program/newshour/20121011/103593.shtml
expect a House condemnation, sorry ‘suspicions and strongly recommend against’ statement against Lenovo sometime soon, because, oh i don’t know, Chinese spy devices in the plastic or living amongst the electrons of the atoms inside a Lenovo tablet.
Already we;ve seen a mass general assault against Chinese businesses from the USG. We’ve got Huawei and ZTE, we’ve got the Chinese solar companies slapped with tariffs, we’ve got Obama blacklisting a Chinese firm from building windfarms, need i say anything more? either this election cycle has gotte so cutthroat that american policymakers are willing to burn down their entire economy out of a desire to stick it to the Chinese breathing down their necks, or they’re living in another world.
either way you look at it, it’s trade war now. Especially now that the rest of the anglo nations are joining the bugle call and the indians too, to boot. democracies in these countries have failed, so they look to an external enemy: China.
Zack says
fellas, basically what this is, is a tactic in PR called ‘poisoning the waters’
Huawei is poised to reap massive profits and business in the US, at the expense of Cisco, so the protectionist and nationalistic americans rattle the alarm and drive it into the American public consciousness that Huawei is some form of cover of Red Chinese imminent spying/invasion like some horrible B-film from the 60s.
Now you can look at it one of two ways;
1) let the americans miss out on Huawei’s advantages, as Cisco continues to lose its competitive edge even with its captive market in the US
2) let the amercans suffer for their sins as Huawei and the Chinese gov. roll back against US economic means of containment. meaning US firms are elbowed out of China as Chinese firms are being elbowed out of the US.
bigger question on my mind is, what are ppl like state governors of US states who rely on Chinese investment and infrastructure going to say about this? to their credit, some of the american companies who do business with the Chinese have criticised the solarworld/tariff move, but that’s not enough. Either there has to be an attitude change amongst Americans or prepare for another round of Great Depression.
N.M.Cheung says
Those types of issues are expected. Although U.S. wants Chinese investments yet it has been placing all kinds of obstacles from preventing Chinese companies from acquiring U.S. companies and technologies, from wind farma been next to airforce bases to Unocal of oil been strategic asset, and mining companies next to military bases. I don’t think there is any mineral lands not near any military base if you want to finesse it. Instead of staying with U.S. treasury bonds I think China is wise to diversify and invest in Africa and South America as qE 3..4.. etc will eventually debase the dollar to a crisis point.
jxie says
One of the better comment on this, though I can’t see how even if Huawei does all it asks in the last paragraph, the belligerent US congress will mellow out. In their fantasy world, the world should be wired with telecom gears that are backdoored to the world’s exceptional police, persecutor and judge; but in this real world, almost all of the telecom infrastructure gears are made in China.
YinYang says
@jxie
Could you paste the comment here. That link is behind a reg/paywall. thx.
jxie says
Too late for America to eliminate Huawei
By John Gapper
To read the scathing condemnation of Chinese telecoms equipment suppliers fired from Washington this week, you would think we still lived in another world. In that world, telecoms networks were built by national monopolies such as AT&T, France Telecom and British Telecom, and outsiders stayed away.
But we don’t.
You know things have come to a pretty pass when US politicians throw their weight behind a French company because the alternative is worse. That would be the effect of barring Huawei and ZTE from the US market on the grounds that they are shifty front organisations for the Chinese government and the People’s Liberation Army.
It would aid Alcatel-Lucent, the troubled 2006 merger of the French company with Lucent, descended from Western Electric of Cleveland, Ohio, which was bought by AT&T in 1881. Things have since moved on and Huawei Technologies and ZTE of Shenzhen in southern China are the new Western Electrics.
The US House of Representatives intelligence committee, with its demand to bar Huawei or ZTE from gaining US contracts or merging with US companies, is living in the past. The time to declare telecoms a strategic, protected industry like defence, was 20 years ago; now is the time to make a deal.
“Huawei and ZTE represent something new: a former third-world country producing first-world technology. The American corporate psyche finds this difficult to handle,” says John Quelch, dean of the China Europe International Business School in Shanghai.
It was obviously tough on the House intelligence committee, which has thrown many accusations at both companies, in particular Huawei, which has grown to share industry leadership with Ericsson of Sweden since it was founded in 1987 by a former PLA officer.
This sounds dodgy, given the PLA’s ambitions in cyber espionage and mass efforts by Chinese hackers to acquire US military and industrial secrets. Former executives of Nortel Networks, the Canadian group that was Huawei’s rival until it went into Chapter 11 bankruptcy protection in 2009, complained of constantly being hacked from China in the 2000s.
“A number of states are engaged in economic espionage and China is the most prolific,” says Mike McConnell, a former head of the US National Security Agency who is vice-chairman of Booz Allen Hamilton, the consultancy. “Research and development costs a lot and it is cheaper to steal it.”
The chief accusation is that, if permitted to build networks for operators such as AT&T and Verizon, Huawei would build traps into the software and hardware. Its friends in the Communist party could then use them to hack databases or to bring the networks down in a war.
It is foolish to ignore the potential security holes in telecoms networks. The NSA has itself been accused of spying on US and foreign internet traffic by monitoring traffic passing over American networks.
But barring Chinese companies does not solve it. Alcatel-Lucent has a venture in China with Shanghai Bell and much of the equipment used by Ericsson and others is made in China. If the party and the PLA wanted to be sneaky they would tamper with these components.
Nor is there direct evidence of malfeasance against Huawei and ZTE in the report, although one section is classified. Meanwhile, the committee alleges that the companies breach patents and enjoy support from China in the form of soft loans.
Both could be true but they are the stuff of trade and intellectual property disputes rather than an intelligence concern. The committee undermines its case by sounding as if it seeks any excuse to exclude Chinese competitors.
The companies have not helped themselves. Huawei is a reclusive outfit that did not publish the names of its directors until a few years ago. Sun Yafang, its chairwoman, is reported to have once worked at the Ministry of State Security and, like other companies, it has an internal Communist party committee whose exact purpose is mysterious.
Yet Huawei is not easily categorised as a state stooge. It is not state-owned (ZTE has closer links with Guangdong province) and was among start-ups that flourished in Shenzhen’s economic zone in the 1990s. It is still private and claims to be wholly employee-owned. “Huawei is an independent, quite arrogant, company,” says Duncan Clark, a Beijing-based consultant.
In some ways, it is a symbol of the very China the west has an interest in encouraging. China’s government declared in 2006 that telecoms was one of seven strategic industries over which state-owned enterprises should retain “absolute control” yet Huawei was built by an entrepreneur who admires Silicon Valley.
Huawei seized 20 per cent of the global market, according to Bernstein Research, by producing equipment at lower prices than western rivals, triggering a wave of consolidation. In the US, where competition has been effectively curbed, Ericsson and Alcatel-Lucent have a duopoly.
The best thing for US consumers would be to admit Huawei and ZTE with safeguards. In the UK, Huawei’s equipment is examined by former staff of GCHQ, the UK intelligence service, before being used by BT. The US and Australia, which has barred Huawei from a planned network, could go further.
The US might require Huawei to list in London or New York to illuminate who owns the company; submit technology to the NSA; and separate its US division like a defence group. It could even demand the dissolution of its Communist party committee. What it cannot do is recreate the past.
Ray says
@jxie
Nobody in the west attempt to do a proper case study on Huawei’s business model. A majority of Huawei’s share is own by the company’s employees. Isn’t this supposed to be the Utopian model company? Instead because it is not publicly traded hence not owned by hedge fund, mutual fund and other big capitalist entity, it is a secretive evil entity!
maofucious says
I think there are legitimate issues to be discussed, such as the last paragraph in the FT piece alludes to, about the transparency of businesses in China (a much larger problem for China, foreign investors, and others as well.) Perhaps also some issues on the technical side and supply chain management, which I don’t know about. I wish congress would address these problems in a more direct manner, because discouraging an innovative private company like this just pushes business back away from the private model, towards the state again.
I don’t necessarily think this is anything worse than what China has done to American tech companies in their own country. The whole VIE corporate structure came about because foreigners weren’t supposed to invest in China’s tech sector. The bad publicity comes because the US is supposed to have higher standards, and it’s true.
Zack says
if there’s something i’ve noticed about China’s ascension, it’s that american/western commentators become more and more hysterical and appear to live in another world.
ppl-in america, mind you-have even started to accept the japanese version of ww2 history purely because it’s against China. THat’s how ridiculous it’s gotten.
William says
@Ray
On Huawei’s business model, the podcast episode I mention in this comment gives a pretty good run-down.
@maofucious
Good point. But transparency works both ways. Specifically in terms of whether you can invest, China has a straightforward list (“catalogue”) of the sectors you can invest in as a foreign enterprise, versus the sectors where it’s restricted / forbidden. The US doesn’t, instead it’s “case by case” with review by the Committee on Foreign Investment in the US, but that means you run the risk of a long-drawn out political process (see also Dubai Ports World trying to buy shares in ports, an utterly ridiculous case — Dubai? Anti-US?). China has more restricted sectors (eg starting a car factory – no more than 50% ownership) but at least the rules are sitting right there on paper for everyone to see.
Charles Liu says
@William
Will, even if there’s a valid point, it is now clouded and obfusicated by the political charges. For one the insinuations around Huawei CEO’s military connection is completely bogus. Just because he is a vetran doesn’t mean Huawei poses national security risk, as weth most US companies with leadership having military service record would not pass this test. Same thing with government contract, should GE, ATT, GM Ford, Boeing all be barred fro China because of US government contracts?
Also the generalized “state link” broadly levied against Chinese companies is often without merit. Should large American companies with government relations office be accused in the same way?
Zack says
China looks like it’s starting to respond to and adapt to these massive economic attacks against them:
http://www.atimes.com/atimes/China/NJ16Ad01.html
it’s fair to say that in the event of a trade war, both parties will lose, but in the case of China and US/EU/Japan, it’s China that will be in a better position to weather the loss, whereas the aforementioned not only have massive debt but also precarious economic growth.
maofucious says
I have to disagree – this is one of the big misconceptions here. If China were to stop buying US debt, it would be one of the best things to happen for the US and global economy. The Fed would have more room to use QE policies to stimulate the economy; China would be forced to find more productive uses for that capital, which is currently just dead weight on its balance sheets. US firms would either be forced to hire US workers (if trade stopped completely), or ideally – if the US got its way and eliminated the trade deficit while keeping some trade open – it would increase its exports.
A trade war would have a mix of positive and negative effects. If it had been done in the depths of the financial crisis, it would have had only positive effects for the US.
Ray says
@maofucious
Again not true, as the US treasury would simply buy them up. The Chinese side treat the US bond partly as saving and primary stock pile of foreign currency.
If a trade war would benefit the US, they would have done so long ago. If not for the US threat Japan and West Germany would never agree to revalue their currency. However, most US heavy industries did not take advantage of the lull and Germany and Japan’s export to the US increase many times.
jxie says
@maofucious
Oh boy.
This is a very complicated what-if topic and a lot depends on the details of a trade war, and how other countries react. It doesn’t help that Economics is such as dismal “science”. Both Hayek and Keynes were hailed as great economists, or more contemporarily both Milton Friedman and Paul Krugman were rewarded the Nobel Prize — the two can’t be both right! Anyway, it’s actually detrimental to you a whole, to read economic opinions out there without a good understanding of the different economic theories and a capability of analyzing these opinions. Exhibit A is your comment…
In a trade war that China stops buying the US government debts, there will be a host of negative consequences to the US, of which some are short-term, and some are long-term. Inflation will likely go up, with a decent chance of running away. China’s willingness to hold and continuously add a large quantity of US debts, while the US is running some dizzying level of fiscal deficits, is by far the single most disinflationary force to the US. During the recent money printing binge, e.g. QEn, “Operation Twist”, official inflation numbers have been tamed. However, products and services with large domestic components, e.g. health care, have experienced high inflation. It’s only products and services with Asian sources, especially China, with the help of some bureaucratic chicaneries such as hedonic adjustment, show very little inflation. Should China be forced out of its own inertia of continuing this unsustainable policy, and starts to treat USD as just another paper currency, in my read, there would be a very high chance (>80%) that the US would experience a very bad case of stagflation. China will likely be worse off, at least initially because of the economic dislocation — but China still has an army depot of fiscal ammo that can be used.
In my opinion, most commentators have missed the main cause of China’s rise and its trade surplus vis-a-vis the world, especially the US. Most commentators point to its currency policy, or industrial policy, or economic policies, etc. All of these policies aren’t new — other countries have tried before and on average the results weren’t impressive. The single most important driving force behind China’s rise, is China’s rapid improvement in education thus the quality of its labor force. As it stands, an average Chinese youth will have more school hours than his/her American counterpart, compared to their parents and grandparents whose school hours were about 2/1 and 3/1 of their American counterparts, respectively. Within our lifetimes, we will likely see the fortunes of the two countries reverse, at a per capita basis.
jxie says
BTW, if you haven’t watched this, it’s quite funny: Quantitative Easing Explained.
Ray says
@jxie
It would be funny if it is not such a serious matter. The biggest problem I have with QE is that they are not reaching the right targets, if those fund can be channel to the middle class it would make a real impact.
jason says
Surprise! Surprise! Surprise! A 18-month White House-ordered review of security risks posed by suppliers to U.S. telecommunications companies found no clear evidence that Huawei Technologies Ltd had spied for China
http://wolfgroupasia.visibli.com/share/4SRw8z
maofucious says
I had to highlight this part. You’re really more worried about inflation (and in particular, “bureaucratic chicaneries”) in the US than in China? Where real estate prices are shooting for the sky – despite government regulations specifically designed to stop them – instead of scraping bottom?
China really doesn’t have that much fiscal ammo to be used. In fact, it’s not a question of existing balance sheets – central banks can always just print new money as they see fit. The problem is finding places to put the money. Last time they tried this, too much of the money ended up in unproductive areas (like real estate) and from what I’ve been reading, there’s an emerging consensus not to do that again.
This by the way is a really bad thought process.
The purpose of QE is most definitely not to give anyone free money, it’s to correct problems in the money supply. If the Fed printed money just to hand out to people, you can bet than any economist would be against it. The point is that as the economy improves (in the abstract), the middle class will eventually see the benefits.
jxie says
@maofucious
First have to point this out: real estate prices aren’t a part of the inflation calculation, but rental prices are. These two are strongly correlated but they sometimes don’t go in lock step because of some other reasons such as interest rate, tax, inflation and inflation expectation, etc.
My mistake was packing too many ideas in one paragraph, of which some just went over your head. Allow me to dumb it down and try it again:
China has a trade surplus vis-a-vis the US, i.e. China produces more than it consumes, and the US consumes more than it produces. In a trade war between the 2 nations, China will be hard pressed to find replacement buyers, especially at prices as high as the previous US’ buying prices; the US will be hard pressed to find replacement sellers, especially at prices as low as the previous China’s selling prices. Ergo, the trade war is inflationary to the US, and deflationary to China. A sudden inflationary pressure, against the backdrop of QEn, is not good.
In a paper money era, of course the central banks can always print new money — theoretically even after the supposed “point of no return” when the debt serving cost each year exceeds the fiscal income. The trick is not turning into another Weimar Germany. For instance, Japan is quickly approaching to that “point of no return”. By fiscal ammo, I meant China is at the opposite spectrum of Japan. To continue with this analogy, the curious fact is that Japan with its fiscal ammo running dangerously low, is still all gun blazing…
Why real estate investment is unproductive? Sure it’s not related to production in first degree such as investment in new machinery, but conceptually it’s still a part of the productive investment. Think about it: don’t new factories need more business real estate spaces? Don’t new productive activities require more housing for producers and labors? Money will always do what it does best: flow to the places with the highest return. The seemingly elevated real estate prices reflect mainly: 1. China’s low to none-existent property tax; 2. the expectation of future incomes.
Methinks the policy makers decided that unless there is a sizable risk of deflation in the horizon, the famed “4 trillion yuan” stimulus package is not to be tried again — but my points are: 1. China can; 2. China will, if the conditions warrant it.
maofucious says
You’ve just made the same mistake again with that paragraph. 🙂
First of all, inflation refers to the prices of goods sold in an economy, not sold by an economy.
I assume what you mean by this is that if the US (and/or other countries) stopped buying Chinese goods, they would be consumed domestically, as this would be the only way that prices abroad would spread inside China. But what are these goods? A large portion of them are unfinished industrial goods. Many producers in China (even if they produce finished goods) have zero experience marketing them, expecting the sellers to find them. Really, what the Chinese economy needs right now is services. Are these light industries going to turn around and start producing financial products?
The key question: if these companies could produce what China wanted, why aren’t they already? It would certainly be easier that way for them, without having to deal with the geographical and cultural distance. So it’s much more natural to assume that those sales are lost when their customers go away.
But just to be thorough, suppose the opposite, that the domestic producers dump their products on Chinese markets after losing their American customers, and prices go through the floor. Then what I said above is still true: the ability to stimulate the economy depends on the availability of places to put the money. If China has oversupply of a few sorts of products, and inability to produce other types of products, than there are no investment opportunities, and no attempt at fiscal stimulus will work, regardless of forex holdings.
I just noticed that you have Pettis’ blog on your blogroll. These are not my original ideas…
jxie says
@maofucious
I am not sure the purpose of your post, which certainly wasn’t addressing to my point. My contention was your initial assertion:
My point is if the reactions (reducing imports from China, China selling US debts) should happen, it’ll be inflationary to the US, which can’t be “one of the best things to happen for the US and global economy”.
1. This is not my blog.
2. I’ve read Pettis since at least 2007. I can write a very long post about Pettis but honestly don’t feel like it. Like they say, opinions are like ass, and everybody has got one. Pettis, IMO, has probably been the best short out there for financial opinions on China, a.k.a. trading against him would’ve been fantastically profitable. Well, he finally put the stick on the ground and called for a commodity bear market with a firm day (by 2015). Let’s see how he weasels out this one…
no-name says
This may not be related to any kind of recent US Congressional or White House investigative reports but nonetheless still very interesting to read. Here is another kind of ‘ report’ worth investigating by people. It is at http://www.viewzone.com/wardeaths.html
maofucious says
@jxie My point is simply that the US has the means for non-inflationary fiscal stimulus in response to a trade war, whereas China does not (or only at the expense of long-term financial stability.) The US still has good investment opportunities, given its high consumption to investment ratio, so capital can go to real investments. As for the role of debt of in all of this, see my newest post.
jxie says
@maofucious
I thought your original point was that “[t]he Fed would have more room to use QE policies to stimulate the economy”. Just so that you know, QE policies are monetary policies, not fiscal policies. My sneaky feeling is that you don’t know the differences between monetary policies and fiscal policies… But let’s say you really meant a new idea, how exactly does the US have the means for more fiscal stimulus when the annual fiscal deficit to GDP ratio is at a Greece level of 8+% already?
maofucious says
This is getting a little beyond the point of this thread…but the answer is of course QE. If the Fed buys government bonds, then the government has money that it could invest using fiscal policy. And if they were viable investments, which was my condition, then the government would eventually be able to back out of them and pay back the QE. Since US bonds are literally used as a reserve currency, there is no need for a hard and fast distinction with cash money – it’s all aspects of the same thing.
jxie says
@maofucious
It’s not how sausage is made! While the Fed has relatively free reign in the monetary policies, the US fiscal policies are controlled directly by the Administration and the Congress. It can’t just expand willy-nilly, and thank goodness for that. Europe is even more extreme — it has a single central bank in ECB, but a load of fiscal authorities and a lot of actors all with their own angles.
Any monies in the recorded human history, from Roman Denarius and on, once the authorities started the road of money debasing to pay bills, be it diluting the silver content, or modern-day QEn, have never ended without a collapse of the regime or a revolution. The temptation is just too great to resist. Not until at the end of a slippery slope, it is all a great joy ride.
My parting gift is Bill Gross’ commentary, if you don’t read it regularly.
Mister Unknown says
http://www.youtube.com/watch?v=PhRmC6QbL6c
You can always rely on CBS to portray all things Chinese in the worst light, but this one was quite comical (& not by design).
During this 60-minutes story on the Huawei boogeyman, One of the policy analysts interviewed stated that unlike the Chinese government, the US government cannot force US companies to do its bidding. But then the rest of the news story gave numerous examples of how the US federal government sent agents to pressure US businesses both large (Sprint) and small (a rural ISP) to stop dealing with Huawei & ZTE, even though there is no legal requirement to do so.
I know we praise westerners as the best propagandists in the world, but once in a while we can laugh about their own exposure of their blatant hypocrisy; I wonder if most people in the US actually recognizes or cares about the fact that their own propaganda is so obviously hypocritical.