U.S. Practices the Art of Zen Protectionism on Huawei

0 Comment

There’s really very little commentary necessary for a story like this, although I will send along some of my exasperation. Here’s what went down on the latest China outbound foreign investment story:

Huawei Technologies Co. failed to reach agreements to buy two U.S. assets last month, even though the Chinese phone-equipment maker offered at least $100 million more in each case, according to two people with knowledge of the matter.

The sellers doubted Huawei’s ability to win U.S. government approval to purchase software supplier 2Wire Inc. and Motorola Inc.’s wireless-equipment unit, the people said.

I just want to highlight what happened here, because it’s slightly weird. Huawei tried buying U.S. computer company 3COM a couple of years ago and were blocked (politically) by the threat of being dinged by the Committee on Foreign Investment in the United States (CFIUS). Huawei ultimately withdrew their offer in the face of opposition.

So the 3COM deal is on everyone’s mind, as it should be. But there are a couple of things to think about here: 1) opposition to the 3COM deal was f@($^! crazy to begin with, not to mention blatantly protectionist; and 2) that was a different deal!

CFIUS is supposed to review deals, meaning that they should be looked at separately. People shouldn’t be thinking “Gee, that last one didn’t go that well, so better not try another one.” In other words, once a company gets a CFIUS rap sheet, the taint will stick to them for years thereafter. It’s patently absurd, not to mention unfair.

Why does Huawei get into trouble with U.S. investments? First and foremost, its founder, Ren Zhengfei, used to be an army guy, and the company still has strong ties to the PLA. Under that logic, General Electric would never be able to do business in China at all, right?1

Another “problem” cited by the Bloomberg story is that Huawei has had some IP trouble, including some litigation. Oh noes! Listen, not only should outside litigation have no bearing on a CFIUS review (unless the case involved spying or something), but Huawei is a high-tech company! Show me an IT hardware firm that isn’t up to its eyeballs in patent disputes, and I’ll be shocked.

Bottom line: the U.S. was being protectionist in the 3COM case. With this latest bid by Huawei, the U.S. didn’t even have to do anything. Just the memory of the earlier incident was sufficient to scare off the parties involved.

The U.S. has apparently perfected the art of foreign investment intimidation, aka Zen Protectionism (I think I’ll trademark that).

  1. Yes, I understand the core issue here. If the U.S. assets in question include super-sensitive tech that the U.S. doesn’t want to fall in the hands of the Commies in Beijing, it shouldn’t allow it to be bought by Huawei. That doesn’t explain what happened in 3COM though, not to mention the CNOOC/UNOCAL deal. []

9 responses on “U.S. Practices the Art of Zen Protectionism on Huawei

  1. G.E. Anderson

    So China is tasting a bit of its own medicine. We shouldn’t be fooled by howls of anti-protectionist sentiment coming from Beijing. The truth is that China is among the most protectionist countries on the planet. The “laws” used by China to limit entry, or if not entry, flexibility of foreign companies in China are many.

    I’m not justifying protectionism by the US, but, really, until China can drop a lot of its barriers, it has little room to criticize a much more open America. If China really wants to play ball, they need to call America’s bluff by dropping their own barriers. Until then, they will find every major potential acquisition thwarted by Congress. I agree with you; that’s not a good thing. But that’s just the way it is.

    1. Stan Post author

      It’s certainly true that China is protectionist, and worse than the US. I’m particularly sensitive to protectionist actions by the US, though, because I always feel than when the US comes to the table decrying such actions, they should be there with “clean hands,” occupying the moral high ground and able to really thunder against such practices. When they do this stuff themselves, they allow China to just run through such instances during negotiations, in effect justifying their own bad deeds with a litany of US abuses (you do it too, so why are you complaining about us?).

      The counter-argument of course is that the US needs to deal with China on a reciprocal basis, since that’s what China does itself. I’m not saying that’s obviously a wrong strategy, I just traditionally like to go the other way and stay on the side of the angels.

      1. DeWang

        Good article. I am not sure if I’d characterize this behavior as “Zen.” This protectionism was simply xenophobic.

        You said, “It’s certainly true that China is protectionist, and worse than the US.”

        Can you clarify? I’d be interested to see what stats you use.

        1. Stan Post author

          I’m not sure you picked up on the “Zen” reference, as I was using it in an American slang sort of way (i.e. doesn’t have anything to do really with Zen Buddhism). My point was that the US is now so good at protectionism against Huawei that they do not even need to actively do it, but rather can rely on their past deeds to sour deals. In other words, the US is the master of “action in inaction,” if that makes any sense. The reference was tongue-in-cheek.

          As often as I call out the US for protectionism, yes of course China is worse when you take a look at the big picture. That includes, by the way, geographical protectionism within China between domestic companies. I look at this as a lawyer and someone who teaches foreign investment law, not as an economist. I don’t think a statistical approach to protectionism is as useful as looking at the law on the books and how it is applied. Just think about all of the industry sectors that are closed/restricted to foreign companies in China and then compare that to the U.S. You could also look at IP protection, which still suffers from tremendous local protectionism. There really are lots of examples — this is not much of an open question and not one that you would see disputed by serious academics.

          Note however, that this does not address whether it is appropriate for China, as a developing nation, to still engage in a certain level of protectionism (e.g. infant industry protection). That’s a separate issue from whether the protectionism is there or not. Discussions should focus on the normative question, not about whether China is protectionist or not.

          1. DeWang

            I am interested in the “big picture” too. And I too think the normative idea needs to be part of the discussion.

            That said, I think you’ve just contradicted yourself:

            1. You said:

            “I look at this as a lawyer and someone who teaches foreign investment law, not as an economist.”

            Of course, Chinese laws are going to be more protectionist in nature, because China is still a developing nation. China’s entry into WTO was under that premise, and the whole world recognizes that.

            But, if you casually beat on China for being “protectionist” ignoring this developing nation status and ignoring the realities of the arrangements with WTO, then this is now ignoring the “normative” part of the discussion.

            Also, is China reneging on the timeline and her obligations to WTO? Generally not.

            2. Statistics is important because they tell you what is reality.

            Sure, the U.S. buys more from China. That’s looking from the consumption side. From that perspective, an argument can be made the U.S. is less protectionist.

            From the supply side, let’s look at ownership of production by U.S. companies within China vs. ownership of production within the U.S. by Chinese companies.

            Is there a dispute on this second point who is more protectionist?

            You said:

            “Discussions should focus on the normative question, not about whether China is protectionist or not.”

            Exactly. So, do not label China “protectionist” so casually as you have done. That’s why I commented.

          2. Stan Post author

            Um, I still don’t think you read my follow up quite right. I was not “beating” on China. In fact, I said that there was a normative argument to discuss — and I didn’t even come down on one side or the other. I’m not sure, therefore, why you decided to assume you knew what my position was before I said it. Please take another look at my last paragraph from yesterday.

            On the use of statistics, I also specifically said that I would prefer not to look at the issue from that perspective. Trade figures do not tell you much about protectionism because there are many factors involved in whether one country sells to another. So I didn’t go there. Then you go ahead and introduce trade figures as a straw man to knock down.

            Your last point doesn’t make a lot of sense. I have been trying to say that there are two issues: is China protectionist; and is that good/bad? The first question doesn’t seem to be in dispute while the second question is very definitely something that can be argued either way. I do label China a protectionist casually, because everyone else does so as well (both people that think it is a “bad” thing and those who support China’s industrial policies). Even Chinese economists argue that as a developing country, China needs certain protections from foreign competition; this is essentially admitting that protectionism is needed.

            I’m not sure why you take issue with this. Do you really want to argue that foreign companies are not more restricted legally from doing business in China than Chinese companies are in places like the US? That’s a very easy thing to show. If you can prove it, feel free to make your case.

            My overall point: if your intent is to defend China’s policies, you should focus on an argument you can win, which is the normative one.

    1. Stan Post author

      I don’t think there’s much connection. Huawei already does enough business in the US to offer sufficient targets for litigation.

  2. DeWang

    I simply took issue with your response to G.E. Anderson in comment #2 above, because you left out the normative part.

    There is really no need to debate the normative argument, because China’s entry into WTO was partially under developing nation terms – U.S. and E.U. leaders recognized the normative argument.

    Since the Western leaders have really “bought” into this normative argument, I find it the more “irresponsible’ to have it left out.

    ——

    Even with China having more protectionist laws – and – as your article points at in the case of Huawei, Chinese companies are blocked by U.S. protectionism in practice (absent of such laws). So I argued, in fact, if you look at how much production in China is owned by U.S. companies vs. ownership within the U.S. by Chinese companies it is clear Chinese companies hardly own anything. In effect, the U.S. is more protectionist.

    Why is this strawman?

    Sure, I agree with you, there are tons of confounding factors (again reason to be “normative.”)

    —–
    Btw, if you talk about strawman, I really think you have one in your comment #2.

    Even if the U.S. drops the nonsense which caused the Huawei acquisitions to fail, that does not automatically give the U.S. the moral high ground. Next, the U.S. has to comply with WTO and the negotiated terms of China’s entry into WTO foremost just as is required of China.

    Finally, it depends on what is your moral.

    Regarding angels, I thought they deeply cared about helping the poor so they are not taken advantage of by the rich.

    So, moral high ground really depends on how you set the bar.