U.S. Government vs. Huawei, ZTE: Not the Usual China Bashing

October 9, 2012

I’m not one to shy away from a discussion of China bashing, particularly not when it involves the U.S. government during an election year. Indeed, I’ve pretty much been writing three or four posts every week for the past few months complaining about either Mitt Romney or Barack Obama, so this is certainly familiar territory.

Just days ago I wrote about the case of Ralls, the Chinese company that purchased several wind farms in the U.S. The deal was forcibly unwound when the U.S. government, ultimately the president himself, determined that there were national security issues. I found the whole thing odd, and while I didn’t see any protectionism with the Ralls decision, there did seem to be some politicking/China bashing at play.

I say all this to establish some credibility on this subject before I give you this conclusory statement: I don’t think that the House Intelligence Committee Report on Huawei and ZTE, which I discussed earlier today, was an instance of either protectionism or China bashing. (The members of the Committee are not huge fans of China, though.)

Since the report was issued last night (U.S. time), the usual suspects have been out in force, including local media, complaining about protectionism and China bashing, gnashing their teeth about the U.S. election, and calling for Beijing to reciprocate with a ban of Cisco products. Cisco is the big U.S. competitor in the telecom and network infrastructure sector.

Let’s take a deep breath here folks. Allow me to address some of the criticism (I stopped after four items, but there are more out there).

1. The Report is Protectionist

OK, this is certainly possible. For what it’s worth, I usually bring up protectionism when either a) there is specific evidence of protectionism, like a conflict of interest, campaign donations, etc., or b) when the underlying decision is so unjustified that there is no other explanation.

Which one do we have here? Is there any evidence of protectionism with respect to the actions of the Committee? Is one of these guys in the pocket of Cisco? If so, I haven’t seen any evidence in the polemics that have come out today. If anyone has that information, I’d love to see it.

Is there no other credible explanation for the Committee’s conclusions? Hardly. Even without getting to the substance of the report itself, we could chalk it up to election-year China bashing or xenophobia. In the absence of any other reason, that seems much more likely than protectionism, for which we have no evidence whatsoever.

2. The Report is China Bashing

A good argument, particularly with the U.S. election only a few weeks away. However, to make this argument stick, we need a couple of things. First, it would help if, again, there is no other credible explanation for the substance of the report. Second, the folks responsible for the report should be benefiting from the PR.

I took a look at Mike Rogers, the head of the Committee. I figured if anyone was playing this up and getting in some China bashing, it would be him. Maybe he’s in the middle of a difficult race back home in Michigan and needs to demonstrate that he’s tough on China. How about that?

Well, that argument’s pretty weak. Rogers has been in the House since 2001. During this cycle, he won his primary in a landslide, has raised $1.5 million for his campaign compared to $50,000 for his opponent, and his seat is considered “safe” by political commentators. In other words, Rogers doesn’t need this issue to win re-election. Moreover, aside from issues relating to cyberwarfare, hacking and industrial espionage (that’s the job of his committee), Rogers isn’t much of a China basher.

For what it’s worth, the ranking member, Dutch Ruppersberger, has been in the House since 2003 and is also in a safe seat. As of the end of June, he was outspending his opponent more than 9 to 1, and in U.S. politics, if you have more money, you almost always win. If you’re an incumbent with more money, it’s pretty much a done deal. This guy does not need the Huawei/ZTE report to be re-elected.

Does any of this prove that there was no protectionism or China bashing involved? Not at all. I just don’t think it’s obvious. To the people out there who are screaming about how blatantly protectionist the report is, you’ve got me confused.

3. The “Public” Portion of the Report Contains No Evidence of Huawei or ZTE Wrongdoing

This is a persuasive argument, and the best one the critics have going for them. The report is saying that Huawei and ZTE represent a security risk, and yet nowhere do they have direct evidence that either of these companies has done anything wrong. Moreover, some of the allegations made in the report are based on statements made and documents obtained from ex-employees. I don’t have a lot of faith in that sort of evidence.

And yet I’m not persuaded. I agree that the burden is on the government to obtain information showing why Huawei and/or ZTE should be barred from certain transactions. If, after an investigation, there is not enough evidence to point to wrongdoing or potential wrongdoing, then the government should step out of the way and let these guys conduct their business.

But that’s not exactly what happened here. According to the Committee, that investigation was never concluded in a satisfactory manner because the two companies failed to disclose sufficient information. As the report stated on page six:

Neither company was forthcoming with detailed information about its formal relationships or regulatory interaction with Chinese authorities. Neither company provided specific details about the precise role of each company’s Chinese Communist Party Committee. Furthermore, neither company provided detailed information about its operations in the United States. Huawei, in particular, failed to provide thorough information about its corporate structure, history, ownership, operations, financial arrangements, or management.

One could, I suppose, argue that these disclosures were sufficient (I stated in my earlier post that this was impossible), but if one admits that the Committee was not given everything it wanted, then it becomes very difficult for the report to give these companies a clean bill of health.

Therefore, a lack of direct evidence could either point to no wrongdoing or simply an incomplete investigation. The Committee argues that the latter is what happened.

By the way, this also addresses claims that Huawei and ZTE are no different from Western firms. That may be true, but the Committee was trying to validate those kinds of claims and was unable to do so because of a lack of transparency.

4. The Scope of the Investigation Was Improper

The issue here is whether it was reasonable in the first place for the House Committee to be investigating Huawei and ZTE and making a recommendation about whether or not these companies should be allowed to invest, participate in certain kinds of projects, etc. The Committee has the legal authority to conduct such an investigation and issue a report, but is it fair?

I’m a supporter of free trade and generally don’t like it when the government does this sort of thing. Moreover, I have not been that happy about the way the U.S. government has reviewed inward investment deals on the basis of national security concerns. Several scuttled deals, including the now infamous CNOOC-Unocal acquisition and the more recent Ralls wind farm deal, had no obvious effect on the country’s national security, which I believe was used an an excuse for protectionism and China bashing, respectively.

But with telecom infrastructure, I’m willing to make an exception. Does anyone really believe that such technology has no national security ramifications? I would find that hard to believe.

We should also keep in mind that it was Huawei that actually got the ball rolling on all this with a letter sent to Congress. Huawei said it would cooperate fully with the U.S. government to alleviate any of its concerns, and the Committee took it up on its offer.

So if the Committee’s involvement was reasonable, what about the questions it asked? Look back at that quote about Huawei’s transparency problems (see above), and you’ll get a good idea about what the Committee was up to.

The common thread here is the PRC government and to what extent it influences/could influence Huawei or ZTE. Many of the questions were designed to answer this basic question. Was that inquiry appropriate?

I’m not at all happy about the knee-jerk suspicion of China that has permeated U.S. politics (and vice versa), but there’s no doubt it’s present. I also have no doubts that each country has war gamed the other, has figured out how to engage in cyberwarfare against the other, disrupt trade/shipping, and so on. That’s reality. To investigate companies in a critical sector that have been accused of being under control of Beijing therefore seems reasonable. You may disagree.

All right, this post is getting too long. To summarize: this report is not the usual (i.e., obvious) protectionism or China bashing. There is a valid argument to be made as to why the investigation made sense and, more importantly, why the Committee felt it never received enough information to give these companies the green light.

Although the report certainly isn’t perfect, and I disagree with some of the statements made by the Committee members, I fail to see a nefarious motive here. It seems that some critics are using “protectionism” and “China bashing” as shortcuts instead of taking the time to develop a well-reasoned argument against the content of the report itself.