How to handle Huawei

ON JANUARY 28TH Liu He, a Chinese vice-premier, landed in Washington ready for talks to calm the trade war between America and China. Instead he was met by a geopolitical tempest. That day America’s attorney-general charged Huawei, one of China’s biggest firms, with 23 crimes, including sanctions-busting, stealing corporate secrets and obstructing justice. American officials also made clear that they view Huawei as a threat to national security, since it builds the telecoms networks that underpin modern societies. Some 170 countries that use Huawei must now decide whether doing business with it is safe.

That decision is hard, because Huawei has more than one guise. The first is benign: it is China’s most successful global firm. Last year it booked $110bn of sales and shipped 200m smartphones. It has built 1,500 networks, reaching a third of the planet’s population. Huawei’s second face, prosecutors allege, is that of a grubby enterprise that breaks laws for profit. They say it offered bonuses to staff who stole intellectual property and that Meng Wanzhou, its finance chief and the daughter of its founder, misled banks about doing business in Iran. She was arrested in Canada in December and authorities there are considering an American extradition request. China says the allegations are a “smear”.

Huawei’s third identity is the most disturbing and the hardest to pin down. It could be a vehicle for Chinese spying or even, in a time of war, sabotage. Rumours of this have circulated for years without any public evidence (including this week), but it makes sense to be wary. Huawei has a high market share in new 5G networks, which will connect everything from cars to robots. The networks’ dispersed design makes them hard to monitor. And China’s leaders are tightening their grip on business, including firms such as Huawei in which the state has no stake. This influence has been formalised in the National Intelligence Law of 2017, which requires firms to work with China’s one-party state.

The nuclear option would be to ban Huawei. Since 2012 it has, in effect, been prevented from selling equipment in America. Australia recently prohibited Huawei’s 5G equipment. Japan has toughened its rules. America could probably put Huawei out of business if it wanted to, by banning American firms such as Qualcomm and Intel from supplying it with crucial components and by cutting it off from the global banking system.

Such aggressive action would come with huge costs for all, including America. The economic ones are obvious: supply chains would be wrecked, at least 180,000 jobs would go, mainly in China, and customers would have less choice. On January 29th an Australian operator deprived of Huawei gear abandoned plans for a new 5G network. But the greatest cost would be a splintering of the global trading system. The line between justice and trade negotiations has become blurred. American officials insist that they are just enforcing the law, but President Donald Trump has said that Ms Meng’s fate is a bargaining chip. Wilbur Ross, the commerce secretary and a China hawk, was present this week when the allegations against Huawei were announced. The exclusion of a firm on the say-so of American officials, without evidence of spying, would set a dangerous precedent. The same precautionary logic would justify banning all hardware made in China or keeping Chinese firms out of industries like e-commerce or finance. Might China be entitled to impose a similar ban on American firms with a big role in its economy? Think of General Motors or Boeing.

Instead of spiralling into a cold war, leaders should create mechanisms and rules that favour trade by minimising mistrust (see Business section). Both sides have a part to play. Host countries need to develop structures to monitor Huawei and offer a fair response if things go wrong. European political leaders complain that they have not been shown evidence of Huawei spying. The more credible and law-like America’s process is, the better. Britain has a board that allows spooks to review Huawei’s equipment. Germany has copied it and Singapore may follow. Governments can lower the risk by insisting on a diversity of suppliers. A country with four networks should have at least two that were not built by Huawei.

For its part, China Inc needs to get serious about demonstrating that it can be trusted abroad. Huawei’s governance is a mixture of obfuscation and opacity. It should appoint foreign directors, recruit Western investors and set up subsidiaries overseas that have their own boards and indigenous managers. China’s government, meanwhile, can complain that it is being treated unfairly, but if it really wants better treatment it should send a signal that it understands the anxieties it stirs up. As the Huawei affair shows, President Xi Jinping’s growing authoritarianism is undermining China’s commercial interests abroad.

Correction (January 31st 2019): A previous version of this leader said that courts in Canada were considering America’s extradition request. In fact the matter is not yet before a court; other authorities are still considering whether to put it before a court. This has been amended.