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BW Businessworld

Widgets From Beijing

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After the Wall Street crash in 2008, there was great fear about the rise of trade protectionism. Fortunately, that fear did not materialise, but new kinds of barriers have appeared. The source of the fear is that China is attempting to exploit open economies of the West to build a dominant technological and military power. Last week, a US Congressional committee issued warning against doing business with two leading Chinese telecom companies. Similar actions against the same companies by Canada and Australia and expressions of concern by the European Union underline their common concern about China. The deep ideological cleavage between the ambitious Communist Party-led China and liberal democracies highlights the fault line running across an increasingly globalised world.
There have been cases where countries have held up or even scuttled business deals seen as harmful for national security. India, for example, took a while to grant permission to Huawei to set up operations. In 2009, Australia stopped the Chinese acquisition of a major mining firm on national security grounds; the US has warned Sprint against joint ventures with Huawei and most recently blocked acquisition by a Chinese firm of wind turbine projects close to an airbase. Last week, the House Permanent Select Committee on Intelligence issued a report warning companies against working with Huawei and ZTE on the grounds of threat to national security. The chairman of the committee, Mike Rogers, bluntly said, “if you care about your intellectual property, if you care about your consumers’ privacy, and you care about the national security of the United States of America”, look for other partners than Huawei. China has denounced the report as a groundless charge by a biased body, but American companies will now think twice before inking a deal.
Founded by a former Chinese army major, Huawei has emerged as a technology giant , a world leader in 4G technology, with operations in 150 countries and revenues of $32.4 billion. Given the success of the company, which a former US official ascribes to “steady, extensive support from the Chinese government” and to “industrial espionage”, and its critical role in information infrastructure, Huawei has long been viewed with suspicion. In a bid to enter the US market in a big way, Huawei wanted to clear its name and asked the Congress to investigate it and offered full cooperation. The result has not been what Huawei had hoped for.
Although the unclassified part of the committee report did not provide any evidence of espionage except a hint that Huawei may have used routers to provide backdoor entry to Chinese intelligence services. The visit to Huawei offices in China and interviews with officials have not allayed their suspicions. The report criticised the firm for not revealing its management structure, relations with the Chinese government, People’s Liberation Army and the Communist Party (which maintains an office right inside the headquarters in Shenzhen) or even their reluctance to provide a list of their large shareholders. 
The fact that Canada and Australia have barred Huawei, and after granting contracts to the company, Britain has taken special measures to protect its communications infrastructure is bad news for Huawei. Coming on the heels of accusations by western governments that China-based hackers have repeatedly and systematically targeted their sensitive military and intelligence networks, the report has reinforced concern. Recent cases of industrial espionage in the US (six out of seven by Chinese nationals) also point to the government’s role. Given the key role of a technology giant such as Huawei in furthering China’s strategic interest, the case is bound to chill its trade ties with the West. Cisco, a major US rival, is likely to face retaliatory action in China, and Beijing could hurt by restricting sales of semiconductors, the bulk of which power US electronic devices. 
The interdependence between China and the West inevitably makes action against a major company problematic. ZTE, which strongly denied the charge, also pointed out that “most or all US telecom equipment is made in China, including that provided by western vendors”. Huawei imports $6 billion a year in components from the US and is indirectly responsible for the employment of 35,000 Americans. In fact, the silence of major US technology firms on the Huawei report is a telling commentary about their dilemma. They fear Huawei, but worry about losing the China market. 
The author is director of publications at the Yale Center for the Study of Globalisation and Editor of YaleGlobal Online 

(This story was published in Businessworld Issue Dated 22-10-2012)