Beating a Dead Horse: Chinese Investment and the U.S. National Security Excuse

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I hope I’m not beating a dead horse here (i.e., talking repeatedly about the same issue), but some of the local push back I’m seeing here in China on these U.S. investment deals is rather mindless. Obviously we have hit a rough patch with respect to outward Chinese direct investment to the United States. Just in the past few weeks, we’ve seen the Ralls wind farm rejection and two separate investigations against Huawei (one of which also dealt with ZTE) which concluded that doing business with the telecom firm(s) would entail a significant security risk.

Is there any connection between the Ralls rejection and the Huawei/ZTE investigations? Here’s a statement from Xinhua today that says yes:

It was not a coincidence that Chinese construction equipment maker Sany Group sued US President Barack Obama and Chinese telecommunications company Huawei was cleared of espionage suspicions by a White House-ordered review.

These two Chinese companies were both blocked from investing in the US market for the reason of allegedly posing “national security risks.”

The national security excuse has backfired, with some US politicians making something out of nothing.

Yes, both of these items involved Chinese companies and perceived national security risks. But if the results were not a coincidence, what does that mean?

I assume that we are supposed to believe that there is a China bashing conspiracy going on here, that Huawei, ZTE and Ralls have all been treated unfairly for some reason (China bashing or protectionism – not sure which one Xinhua was going for this time).

Of course, if you’re going to posit that this was all coordinated, it might help to explain why. Aside from these being Chinese companies and the problems being related to national security, I’m not sure what the common thread here is.

As I’ve written many times now, I have problems with the Ralls decision. I find it difficult to believe the national security objections, particularly since Ralls had already complied with a U.S. Navy mitigation plan. That’s why with respect to this deal, I question whether China bashing or some sort of protectionism might be involved.

With Huawei and ZTE, I take the other position. The fears of future security problems seem reasonable, and certainly not so far fetched that, in the absence of clear evidence to the contrary, I would entertain the possibility of local protectionism or good old fashioned China bashing.

So I’m not buying any attempt at dumping these items in one category and calling it a trend.

Moreover, let’s make sure we stick with the facts. The above quote notes that these Chinese companies have been “blocked” from investing in the U.S. Not exactly true. Ralls had one project blocked, but I don’t see any reason why it cannot continue with other U.S. deals.

For Huawei and ZTE, their future in the U.S. looks much dimmer, although neither the House report nor the White House investigation blocked anything, but were more akin to supervisory opinions. The result might very well be that future deals involving Huawei and ZTE will indeed be blocked as a result of these investigations, but technically neither the House committee nor the White House are the ones doing the blocking.

I am also confused by Xinhua’s use of the term “backfired.” Exactly what has backfired for the U.S.? That’s very odd language. For something to backfire, there needs to be an unwanted effect. The U.S. has made life difficult for Ralls, Huawei, and ZTE, and it has angered Beijing. In the future, U.S. companies may very well run into some problems in China because, you know, reciprocity is a bitch. By the way, China has its own national security review process, albeit a relatively new one. You think it might start using it? You bet your ass. But this is all speculation, and for the U.S. government, so what? Nothing has backfired, at least not yet.

Finally, a quick comment on the Sany/Ralls lawsuit, which I’ve also mentioned before. Sany’s chairman has been quite vocal about how he intends to take this “all the way.” Unfortunately, the U.S. statute that authorizes CFIUS and the president to make these investment decisions does not allow for judicial review of presidential orders. Sorry, but that seems rather clear, and the Ralls “appeal” appears to be a sure loser, unless someone comes up with a creative angle.

It probably doesn’t need to be said, but just because you sue someone, that doesn’t mean that you are supporting the rule of law:

If it is a signal that Obama wants to send to Chinese investors, it would be a very bad one. Investors may rethink their decisions if their assets are handled without legal basis or business logic.

Bashing Chinese companies in the name of “national security” betrays the US spirit of openness.

Resorting to law shows Chinese companies’ confidence in safeguarding their own interests.

Wu Jialiang, Ralls’s chief executive and a Sany executive, said Sany launched the suit because it trusts the US legal system.

If Sany wins the case, it will be good news even for the American people, as it will prove that the US remains a country governed under the rule of law. If Sany loses, many Chinese entrepreneurs may be more wary about future investment in the US.

Oh, please. I don’t like the result in the Ralls case either, but the president undoubtedly has the authority to make that decision. I’m glad to hear that Sany trusts the U.S. legal system so much; too bad it doesn’t trust its U.S. legal counsel more, as I expect that person is probably advising that the suit should be dropped.

I tend to get annoyed when an entire legal system is disparaged because someone doesn’t like a specific case, particularly when the critic is an interested party! I remember when everyone in the U.S. condemned the judicial system there because of the infamous McDonald’s “hot coffee” litigation. The whole thing was remarkable in its stupidity. Similar things are said about China’s legal system whenever there is a high profile criminal case involving a government official. No, says I, those are individual cases and shouldn’t be used to condemn the entire system.

The Ralls decision might have been unfair, and you may not like the treatment of Huawei and ZTE, but I think it’s time to move on.

12 responses on “Beating a Dead Horse: Chinese Investment and the U.S. National Security Excuse

  1. David Wolf

    “With Huawei and ZTE, I take the other position. The fears of future security problems seem reasonable, and certainly not so far fetched that, in the absence of clear evidence to the contrary, I would entertain the possibility of local protectionism or good old fashioned China bashing.”

    Yeah, but Stan, if there is a vulnerability with Huawei and ZTE, why not product coming out of Alcatel Shanghai Bell, or Cisco’s factories in China? If there is a potential hardware- or software-based vulnerability in network equipment, shutting Huawei and ZTE out of the US market is at best a partial solution. You’re forcing the enemy to change tactics, but he can still stick to his strategy.

    1. Stan Post author

      Not to try and duck the issue, but that wasn’t the issue in controversy. If there are other vulnerabilities, perhaps that needs to be looked at as well. But even if you can’t catch everything, that doesn’t negate this more narrow conclusion as to risk.

      1. David Wolf

        Far be it from me, counselor, to accuse you of ducking the issue.

        What I wonder is whether the House Select Committee on Intelligence is doing so. If they take up the broader matter, well and good. If they do not, though, follow the money.

        1. Stan Post author

          Fair enough. We’ll have to wait and see on that. And I’ve been interested in the process here with both investigations. What I’ve read about the House is that this whole thing started after Huawei sent a letter asking to be heard. Not sure if the details on that are accurate, but if so, that might explain the narrow focus.

          What I’m even more curious about, though, is the White House investigation. How did that start? Was the WH interested in cybersecurity? Telecoms? Chinese companies? What other investigations have they instigated (I haven’t heard of this kind of thing before)? No one seems to be asking these questions.

          1. bystander

            http://www.eweek.com/networking/white-house-denies-networking-firm-huawei-cleared-of-spying-for-china

            quoting from the article:

            “In a statement to eWEEK on Oct. 18, a White House spokesperson said the report was not correct and that no investigation has been conducted that cleared anyone.

            “The Reuters report, based solely on anonymous sources, is not correct: the White House has not conducted any classified inquiry that resulted in clearing any telecom equipment supplier, including Huawei,” Principal Deputy White House Press Secretary Josh Earnest said in the statement. “In fact, last October, Huawei was excluded from taking part in the building of America’s interoperable, wireless emergency network for first responders due to U.S. Government national security concerns.” ”

          2. Stan Post author

            You gotta love government-speak. That statement is carefully worded not to say that there wasn’t any investigation, just that no one was cleared by one. Moreover, I don’t think the Reuters piece said that the WH itself investigated, but that it instigated one. I have a feeling Reuters got it exactly right.

          3. bystander

            Right; but WH correction was aimed that whatever investigation did or did not occur (haha) might have cleared Huawei/ZTE. They are not denying (or confirming haha) that the investigation took place, but they are denying that anyone was cleared.

            This case follows, for better or worse, the pattern of many cases that involve behind-the-scenes intelligence. Country X is said to have weapons capability Y. Some high-powered intelligence is obviously involved on the US side. Reports have emerged of the US intelligence guys themselves using some sophisticated electronics / cyber-espionage to arrive at their findings. Country X denies all this and says it is a fabrication. Many reasonable people are already suspicious of intelligence organizations in the US, and the fact that they won’t come public with their findings feeds those suspicions. The intel community has a cardinal rule of not letting the other side know what you know, so they do nothing on their own to clear up the doubt. Toss in some electoral politics, and you have a real mess.

            Still continues to be an interesting case. My bet is that more will be said about this by the WH and others in the US gov’t. This doesn’t quite rise to the level of nuclear threat, so there is probably some pressure for the intel guys to be as specific as possible.

  2. pug_ster

    If the Chinese government go in the level of the kind of scrutiny to the American companies about transparency like the American government to Chinese companies, they can find 9 ways to Sunday of an excuse to get rid of American companies out from China. It is protectionism, plain and simple.

    1. bystander

      I think that’s a pretty accurate summary of the thing from the Chinese side. Which is to say: security concerns in the garbage can, label it protectionism.

      There’s plenty of protectionism in the US of course (and plenty of people arguing that there *should* be protectionism in the US), so the argument that the story of Huawei/ZTE is mere protectionism is pretty easy to sell in China.

      The problem is that it leaves the matter entirely unresolved, with the two parties talking past one another.

      The US has real concerns about what it sees as a concerted effort by the Chinese government to infiltrate public and private computer and communications systems in the US for the purpose of stealing intellectual property and espionage. If you begin by dismissing those concerns as immaterial, then the conversation is over. It’s just as “over” in the US as it is in China. The US intelligence community is definitely not going to throw its hands up and say, well, since they don’t agree I guess we should quit worrying about this problem. And in China it’s over because, well, the conversation never began in the first place.

      The relationship between the US and China is complicated and multidimensional. A cliche’ perhaps, but it’s true. There’s obviously an interest on both sides to favor their own economies over the other’s. That’s natural. Lots of actions are taken on both sides to do this. But there’s also a military / defense / security dimension to the relationship, and this particular story touches it directly. That’s how the US sees it and that point of view isn’t going to evaporate because of a lot of talk about protectionism, which means exactly nothing whatsoever to US intelligence agencies.

      1. pug_ster

        “The US has real concerns about what it sees as a concerted effort by the Chinese government to infiltrate public and private computer and communications systems in the US for the purpose of stealing intellectual property and espionage. If you begin by dismissing those concerns as immaterial, then the conversation is over. It’s just as “over” in the US as it is in China. The US intelligence community is definitely not going to throw its hands up and say, well, since they don’t agree I guess we should quit worrying about this problem. And in China it’s over because, well, the conversation never began in the first place.”

        You are talking about apples and oranges here. I am sure that American government want to spy or China just like Chinese government want to spy on the US. However, the Chinese government government could’ve stole IP and espionage using Chinese or non-Chinese communication equipment. So what you said is really irrelevant. Huawei and ZTE are just providers of communications equipment, but the malicious depends on the customer’s end.

        1. syckls

          pug_ster, the point of the investigations is that the American government suspects that Huawei and ZTE would sell communications equipment that secretly includes software or hardware that can transmit information to Chinese agencies without the knowledge of the user. It has nothing to do with whether or not the user is a spy, and everything to do with the fact that Huawei and ZTE may not be “just providers of communication equipment”.

  3. H.Z.

    I think the Rall case should center on the unconstitutional taking ground. The national security decision may not be reviewable, but the term seems unnecessarily harsh. IIRC Rall was told to unwind the deal within weeks. I don’t see how one can get a reasonable deal for illiquid assets like this in weeks’ notice. Unless there is some hard evidence that Rall is doing something illegal (after all their equipment are already evicted immediately) what is the rationale to force them to take an additional financial loss? Is simply possessing the deed to a property a threat to national security as well?