The arrest of Huawei Deputy Chair and CFO Meng Wangzhou in Canada, whether on US instructions or not, as there has been a White House distancing from the arrest warrant, is a new and unwelcome complicating factor in the hoped for trade war truce between the world’s largest economies.
While a Canadian court has released Ms Meng on bail, easing some pressure from China, market nervousness and a fall in global equity prices has illustrated the link between unintended political decisions and economic fortunes.
How the Chinese react and respond is crucial to the unfolding events in Canada. Following the G20 Argentine meeting, President Xi Jinping presided over a crucial meeting in Zhongnanhai to discuss China’s global relations, the Buenos Aires trade summit with President Donald Trump, and the detention of the CFO of Huawei Technologies in Vancouver.
Huawei Chief Financial Officer Meng Wanzhou was arrested by Canadian authorities on Dec. 1 at the request of the United States with Canadian Premier Trudeau stating that it was not a political decision but based on a judiciary arrest warrant.
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Meng faces US accusations that she misled multinational banks about Huawei’s control of a company operating in Iran, putting the banks at risk of violating U.S. sanctions and incurring severe penalties.
Huawei is the world’s largest supplier of telecommunications network equipment and second-biggest maker of smartphones, with revenue of about $92 billion last year.
Unlike other big Chinese technology firms, it does much of its business overseas including a strong presence in the Gulf, and the arrest of the company owner’s daughter could have ramifications on worldwide operations if not amicably resolved.
China has long felt that the US is unfair to its big tech firms - in particular Huawei, which is the closest the country has to a true Apple competitorDr. Mohamed Ramady
The Chinese face a dilemma though if they reciprocate against Apple operations in China as Apple does not just sell products to China, but makes them there.
In 2017, Apple estimated that between manufacture, retail, distribution and software development it was responsible for 4.8m jobs in China and the company has opened research centres that are providing a home in China for the country’s brightest graduates.
Taking punitive action is like cutting one’s nose to spite one’s face and despite real Chinese anger over the arrest and nationalistic pride to protect its citizens, this could mean Apple being spared Beijing’s retaliatory actions even if Ms Meng finds herself extradited to the US and even jailed.
The Chinese feel that the issue is not really Iran banking sanctions but stifling Huawei’s impressive success against American rivals, especially Apple. The headlines in China is that Washington’s move to stifle Huawei by using Canada as a proxy will undermine itself and that banning Chinese companies like Huawei will isolate US from digital economy of the future as tech companies need each other.
The fallout from her arrest will mean an even more difficult relationship for the handful of US tech giants that have found great fortune in China, in particular, Apple that relied on China for 20 percent of its revenues this past year.
China has long felt that the US is unfair to its big tech firms - in particular Huawei, which is the closest thing the country has to a true Apple competitor.
While it doesn’t come close in terms of yearly revenue - $266 billion for Apple against an expected $100 billion or so for Huawei - the firm did manage to leapfrog Apple in global smartphone sales earlier this year and Huawei is now second only to Samsung, and making strong inroads in the lucrative Gulf market.
But the real success story for Huawei won’t come from smartphones, but the equipment that makes them worth having. Huawei is positioning itself as the vendor of choice for rolling out 5G technology, the next generation of mobile network, hence Chinese suspicion about the whole affair that it is to hobble Huawei.
An element of face saving is required in this bizarre case as the Chinese are sticklers for protocol and felt that their leadership had been humiliated as neither Trump nor Canada’s Prime Minister Justin Trudeau had informed Xi of the Huawei arrest in advance, and he was furious with both for being caught blindsided by what Beijing considers to be a pre-mediated provocation and act.
In light of the arrest of Ms. Meng Wangzhou, the Ministry of Foreign Affairs will as first preventive measure, certainly advise Chinese scientists, technology experts, and business people to take risk prevention measures, and for relevant departments, to reduce or even cancel some visits to the “Five Eyes” intelligence alliance countries, comprised of the US, UK, Canada, Australia, and New Zealand.
Canada’s “lawless, unreasonable, and callous misdeeds,” Xi said, have already caused serious damage to its relations with China. In a rather coincidental arrest of a former Canadian diplomat Michael Kovrig in China, working since February 2017 as North East Asia senior advisor for the International Crisis Group, a Brussels-based think tank that focuses on conflict reduction research, the Chinese have sent Canada a message although the Canadians have stated that the arrest of their citizen is not connected with Ms Meng’s case. Those who know China understand that nothing is pure coincidence in that country.
But the Chinese leadership did not want to burn all their bridges with America after the painstaking trade agreements in Argentina, which China also sees as benefitting its economy which has been coming under some stress from US tariffs.
At the meeting in Zhongnanhai, Xi nevertheless reinforced that China is still willing to reach a trade agreement with the U.S, and willing to import more American goods. Despite the negative impact of the Huawei incident, China will not suspend trade talks with the United States.
This does not mean that China will also give up on its basic red lines for future economic development as President Xi stressed that China must not abandon its core interests nor its high-tech development plans. China-US relations are seen to be at a major crossroads, and after the 90-day truce period, it will be up to the Trump Administration to decide whether to resume the trade war or not, in which case China will be forced to fight back.
Given the fear of reciprocal visiting business executives arrests, for now President Xi is also reported to have said that China would not reciprocate to the Huawei incident by detaining American executives visiting or conducting business in China.
Long arms of the law
If, however, he added, the US were to extradite or arrest additional Chinese citizens with its allies, in what Beijing considers to be a “long arm” extension of America’s own domestic laws, Beijing would have no choice but to detain Americans unfriendly to China, and it could target both US companies and individuals who sell weapons to Taiwan.
This also does not seem to be on the cards as both Chinese and U.S. officials appear to be avoiding linking her arrest to the trade dispute. President Trump also sees no benefit from this case and has said that he could intervene in the matter if he deems it necessary for the sake of higher US national interests.
Speaking at a forum in Beijing the Chinese government’s top diplomat, State Councillor Wang Yi, said the government kept constant watch on the safety of Chinese citizens abroad, though did not directly mention Meng’s case but for the sake of placating Chinese public opinion he added that “for any bullying that wantonly violates the legitimate rights and interests of Chinese citizens, China will never sit idly by.”
Acting against Apple and other high-tech US companies or arresting American executives might provoke President Trump to unleash a twitter barrage arguing that his America First policy and bringing jobs and manufacturing back to the US was right all along.
Looking at the big picture, maybe the whole episode of the arrest of the Huawei executive is merely a side show in a battle for dominance for the future of advanced telecommunication technology and setting red markers for competitors.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia and co-author of ‘OPEC in a Post Shale world – where to next ?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.