“How the arrest of a member of China’s ‘corporate royalty’ could affect trade tensions”, PBS NewsHour

Published December 8, 2018

Amna Nawaz, December 6, 2018

The CFO of the Chinese tech giant Huawei was arrested in Vancouver recently on an American warrant for violating sanctions against Iran. But the company has sparked security concerns for years due to its close ties to the Chinese government. Amna Nawaz speaks with defense contractor and author James Mulvenon about how the incident might affect U.S.-China trade relations that are already tense.

Transcript:

Amna Nawaz:

Over the weekend, it seemed a fragile truce might bring an end to the months-long trade war between the U.S. and China. But a high-profile arrest in Canada is now roiling financial markets further, and it could complicate the efforts to ease trade tensions.

It’s been six days since this woman, Meng Wanzhou, was arrested in Vancouver, Canada. She is chief financial officer of the Chinese electronics giant Huawei and the daughter of its founder.

The Toronto Globe and Mail reports she is suspected of violating American trade sanctions on Iran, and that the U.S. is seeking her extradition.

Today, China’s Foreign Ministry demanded answers from Canada.
Geng Shuang:

China has made clear its solemn position separately to Canada and the United States, requesting them to immediately clarify the reasons for detention, immediately release the detainee, and guarantee the legitimate rights and interests of the person concerned.
Amna Nawaz:

Canada confirms the arrest and the U.S. extradition request, and Canadian Prime Minister Justin Trudeau today said Canadian law enforcement notified his office a few days before the arrest.
Justin Trudeau:

There was no engagement or involvement in the political level in this decision, because we respect the independence of our judicial processes. Further to that, I have not had any direct or indirect conversations with — with any of my international counterparts on this.
Amna Nawaz:

U.S. concerns about Huawei go back to President Obama. The company is the largest global supplier of phone and Internet technology and the second largest smartphone manufacturer.

U.S. officials say Huawei’s close ties to the Chinese government raise security concerns. Last spring, the Pentagon banned all sales of Huawei phones at stores on military bases.

The arrest also came the very same day that President Trump and Chinese President Xi Jinping agreed to a truce in their trade war. Today, the Chinese sent conflicting signals about the potential fallout.

The English-language Global Times, closely tied to the ruling Communist Party, warned — quote — “China should be fully prepared for an escalation in the trade war,” and it cited the arrest of Meng.

At the same time, the Chinese Ministry of Commerce indicated Beijing doesn’t want to disrupt progress on the trade front.

To help make sense of those conflicting signals, James Mulvenon. He works at SOS International, a defense contracting company which focuses on cybersecurity and intelligence, has written extensively about China’s military and technology sector.

Welcome to the “NewsHour.”
James Mulvenon:

Thank you.
Amna Nawaz:

So, the CFO suspected of violating U.S. trade sanctions on Iran.

What do we know about what exactly the company and this woman are suspected of doing?
James Mulvenon:

Well, there was a period in 2008 and 2009 where she was the board secretary of a Hong Kong company called Skycom Tech. And it’s well-known that Skycom Tech was completely owned by Huawei.

But that was the company that Huawei used to illegally divert U.S. technology, violating the sanctions regime against Iran. And she is seen as the key nexus between Huawei and this Hong Kong company that facilitated those illegal moves.
Amna Nawaz:

When you talk about the diversion of U.S. tech, what are we talking about? What kind of technology?
James Mulvenon:

So, specifically, they diverted computer equipment from Hewlett-Packard that would have required an export license to be able to be transferred to Iran, which at the time was under — which was under sanctions.
Amna Nawaz:

So, we know the U.S. has barred Huawei from participating in next-generation 5G mobile networks. They have been pressuring other countries to do the same.

We heard earlier in the report they have banned the sale of their phones on military bases. National security gets brought up again and again. What exactly is the national security risk associated?
James Mulvenon:

Well, even — there’s a lot of discussion about whether Huawei is some sort of front company for Chinese intelligence or the Chinese military.

That’s not actually the most important argument. They are one of the largest — they’re the largest privately owned company in China. And if they were able to actually get a foothold in a U.S. telecommunications market through legitimate market means, and then subsequently the Ministry of State Security or the military came to them and said, we want in, we want to be able to exploit and intercept those networks, given the current political and legal milieu in China, there is no way that Huawei could say no.

And given that kind of a situation, it’s just too dangerous from a national security perspective to allow them to be involved in those networks.
Amna Nawaz:

The timing of this arrest was somewhat extraordinary, right? It happened on the very same day that those talks were kicking off.

What do we know about why that happened?
James Mulvenon:

Well, for the time being, unless I hear otherwise about anything specific timing, I think they had to take advantage of the fact that she was — happened to be in a country that was friendly to the United States, had an extradition treaty.

Obviously, Canada’s a member of the Five Eyes intelligence-sharing group. We have been pressuring the Canadians to not use Huawei equipment in their 5G modernization. But subsequent to that, administration officials were saying today that they felt that this might actually give them leverage in the trade negotiations.

So, even after the fact, they may be trying to take advantage of it.
Amna Nawaz:

Do we know what kind of impact it could have on trade talks?
James Mulvenon:

Well, I mean, in the sense that she becomes a bargaining chip in order to get concessions from the Chinese side.

But, at the same time, this legal case against Huawei has been in place since almost 2011 because of its connection to the previous ZTE case. So, the Justice Department has been wanting to prosecute Huawei for this particular offense for a long time. So this wasn’t trumped-up against Huawei. It’s just the timing of it, I think, is the key issue.
Amna Nawaz:

At the same time, the arrest of this particular executive, so very senior. She has been called sort of a member of corporate royalty in China.

That sends an extraordinary message.
James Mulvenon:

It does, particularly the fact that she’s the oldest daughter of Ren Zhengfei, the founder of Huawei, who is considered one of the most important figures in the Chinese system.

Huawei is clearly the most important national championed company. The Chinese government is extremely proud of their — of their achievements. But, at the same time, she was the CFO, and she was the board secretary that was involved in this particular transfer.

And so if they have evidence that she was the one who was laundering the money, setting up the front companies, facilitating these illegal diversions, then she might just have been the right person for them to indict.
Amna Nawaz:

And we don’t yet know what they know.

But how concerned would U.S. officials be about retaliation, American executives on the ground in China, for example?
James Mulvenon:

I do think that if you’re an executive of a telecommunications company from the U.S. side, or someone else that has been directly competing with Huawei, I would have my go bag ready.

I certainly wouldn’t be planning any trips to China in the very near future. If I was there right now, I would make sure I was carrying my passport with me as I was walking around the city.
Amna Nawaz:

There’s a big question I’m going to ask you to answer in less than a minute, if you can.

There’s been a lot of concern about I.P. theft when it comes to China, right? U.S. officials have been saying that for a while. Did any of this have anything to do with those concerns?
James Mulvenon:

I think this specific case has to do with the illegal diversions of violating the sanctions regime against Iran.

That’s not to say that Huawei has been a Boy Scout on the intellectual theft side. There was a very long case that Cisco waged against them because of the poaching of Cisco engineers, as well as, frankly, the complete and utter copying of the entire Cisco operating system, which they eventually settled with Huawei.

But there were just too many similarities. The motherboards looked the same. They even reproduced the Cisco owners manuals with the same misspellings that had been in the Cisco ones. So it was pretty obvious what they had done.

So while Huawei did have this history of copying, we can’t doubt now that they are in fact one the most innovative telecommunications equipment companies in the world. And this is a serious blow to them, in terms of their getting into the Western markets.
Amna Nawaz:

James Mulvenon, thank you very much.
James Mulvenon:

Well, thank you.

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