19 years ago an unknown Chinese company established its first European sales offices in a suburb of Frankfurt and in a small English town, and began bidding for telecommunications networks. Today Huawei symbolizes the overwhelming rise of corporate China and a global trading system in which trust has sunk.
With sales of $ 123 billion, the brand is known for its very low prices and its dedication to the industrial goals of the Chinese authorities. Since 2018, The United States has subjected it to legal attack, making it a center of the trade war. Now Britain has said that it will prevent Huawei from working on its 5G networks. Other European countries can follow suit. But far from showing a strong Western stance, the saga reveals the lack of a coherent strategy. If open societies and authoritarian China are to maintain their economic ties and avoid a slide into anarchy, a new business architecture is needed.
US security chiefs have always been concerned that Huawei’s equipment was designed to aid espionage and that it would make its customers dependent on subsidized Chinese technology. But more than 170 countries decided the risks were manageable.
Britain, which works closely with the United States on intelligence, created a “cell” of cyber experts to monitor Huawei’s equipment in 2010 and later limited it to less sensitive parts of its network. Other countries replicated this approach. It offered a middle way between a naive acceptance of Chinese state capitalism and a Cold War.
This fine balancing judgment has proven untenable. The Trump administration has urged the world to reject Huawei and impose a unilateral embargo on its suppliers, preventing the sale of some components as well as chips made abroad using US tools. Forced to choose between an ally and a supplier, Britain was inevitably led to the decision made this week.
It has become riskier to do business with a firm that the United States wants to hurt. Huawei, for its part, has failed to reassure British cyber experts, who have complained that its software is becoming more difficult to monitor, nor has it reformed its opaque directory.
Any illusions that there might still be that Chinese leaders respect the rule of law when it matters has been shattered by the events in Hong Kong.
System in decline
The direct cost of getting Huawei off European networks is tolerable, adding less than 1% to Europeans’ phone bill if it is amortized over 20 years. Ericsson and Nokia, two western suppliers, may increase production and new competition is likely to emerge as networks rely more on open standards and software.
The real burden has nothing to do with the antennas, but arises from the decline of the world’s trading system. Perhaps a dozen countries end up banning Huawei; Germany is with one foot on each side of the fence. But it will continue to be used in much of the emerging world, accelerating the division of the tech industry.
Trading depends on common rules but the British decision has been taken amid a whirlwind of lobbying and threats. It is difficult to find in it a principle that can be applied more widely. If the problem is the equipment made in China, then Ericsson and Nokia do it too. If it is about Chinese firms building systems that connect devices (in the case of 5G, robots and machines), then a similar logic could apply to the entire global economy that is digitized. German cars and Apple phones sold in China are packed with software, data, and sensors. Does China have the right to ban them too?
The whole situation fuels a growing sense of lawlessness. The average tariff on Sino-US trade is 20%. Direct investment flows from China to Europe have fallen 69% from their peak in 2016, according to Rhodium, a research firm. Other firms are caught in the crossfire. TikTok faced a ban in India and perhaps also in the United States. China plans to impose sanctions on Lockheed Martin for selling weapons to Taiwan.
Now that President Donald Trump has terminated Hong Kong’s special status, HSBC, a bank with huge stakes there, could be subject to punishment from both China and the United States. Some Chinese banks may be prevented from operating in dollars.
The logic of Huawei’s ban is one of untying and containment. But this will not work if it is applied to the entire economic relationship. The last great authoritarian rival of the West, the Soviet Union, was a mojarrita in commercial matters. China accounts for 13% of world exports and 18% of world market capitalization and is the dominant economic force in Asia.
Instead, a new trade regime is needed that recognizes the nature of China. That is not easy.
The World Trade Organization (WTO), which aims to establish universal rules, has failed to evolve with the digital economy. Nor was it prepared for President Xi Jinping’s initiative to increase the influence of the state and the Communist Party over private Chinese firms and those that, like Huawei, claim to be the mutual property of their workers.
Disillusioned with the WTO, Trump administration negotiators unilaterally tried to force China to liberalize its economy and cut subsidies, using the threat of tariffs and embargoes. That was a fiasco.
So how should commercial architecture function in an age of mistrust? The goal should be to maximize trade in a manner consistent with the strategic security of both parties. That means isolating troubled sectors, like technology, that get a lot of attention but less of the trade: perhaps a third of Western firms’ sales to China, based on our analysis of Morgan Stanley data, for example. These sectors will require careful analysis and international security certification of the kind Britain tried to impose with Huawei. It may not work. But at least trade in other areas could flourish.
Chinese firms should also be required to accept open management of their large subsidiaries in the West, including local shareholders, foreign directors, and managers with real autonomy and public information, all of which help create a degree of independence from the state. This is not difficult: multinationals such as Unilever have been doing it for decades. TikTok could be a trailblazer.
The maximum network effect
Open societies are strongest when they act in unison. Europe may be tempted to act on its own, ending decades of transatlantic cooperation. Yet at some point, soon if Trump fails to win a second term, the United States will reinvigorate its alliances because it has been less effective without them.
The West cannot change China in anything fundamental or ignore it. But by acting together you can find a way to do business with an authoritarian state you distrust. Huawei is a case in which it failed. It is time to start over.
Translation Gabriel Zadunaisky