Last week was a wild ride for China-United States relations and for global markets. What began with the optimism of a 90-day truce in the trade war ended with market turmoil surrounding the arrest, at the request of the U.S. government, of Meng Wanzhou—the daughter of the founder of one of China’s biggest tech companies, Huawei, where Wanzhou is CFO.The immediate media and market reactions speculated that the arrest might derail a US-China trade deal next March. The arrest’s impact on the trade war is only the beginning of what is clearly becoming the American government’s war on Huawei. And that war has very little to do with the ostensible reason for the arrest last week—the violation of U.S. sanctions against Iran.

The Trump administration’s confrontational stance on Huawei is not about trade either. Rather, Huawei exemplifies America’s two biggest worries about China.

The first concern is about economic competition: China’s stated objective is to lead the world in the advanced technologies that will empower the internet of things like AI, robotics, quantum computing and mobile networks. The second concern is about cybersecurity and cyberwarfare: if China becomes a global leader in advanced technologies this will go hand in hand with developing sophisticated capabilities in the likely tools of 21st century warfare.

This is why Huawei is so central to U.S. concerns. Huawei is poised to be a world leader, if not the world leader, in the rollout of 5G digital networks in the next few years—not American companies like AT&T and Verizon. What’s more, the U.S. national security establishment believes that the Chinese Communist Party government ultimately has access to all Huawei equipment and data and could use this access not only for commercial espionage but also for cyberwarfare.

No surprise that the U.S. has essentially blocked all Huawei access to the American market. It has also convinced (or is striving to convince) close allies Australia, Canada, and the United Kingdom to join this blockade and is turning up the heat on other major economies led by Germany and the European Union.

It is hard to judge definitively how compelling America’s case is against Huawei because the details of the accusations are shrouded in national security secrecy. But the following things are at least widely reported:

  • Though notionally a private company, Huawei (notably its founder Ren Zhengfei) has many complex and often opaque links with the Chinese government and the Chinese military.
  • More than a decade ago, Huawei admitted that it unlawfully copied Cisco source code regarding the switches and routers that are the backbone of the internet.
  • Huawei does not disclose details about Chinese-made components it uses in its devices and has admitted that these may be more vulnerable to hacking than some western competitors.

Is this enough reason not to do business with Huawei? Not for most of the world.

Huawei is the world’s second largest seller of smartphones (after Samsung but ahead of Apple) and the world’s second largest supplier of internet routers (after Cisco). It offers high quality products at lower prices than its American and European competitors, which is very appealing in emerging markets where premium prices are not a realistic option.

At minimum, Huawei is a major commercial competitor for American tech companies as diverse as Apple, AT&T, Cisco, and Qualcomm. At maximum, Huawei is a major cybersecurity threat not only to the U.S. but also for countries around the world.

Huawei’s response to the arrest has been that it has done nothing wrong and behaves the same way large Western multinational companies do. The Chinese government is clearly trying to compartmentalize the arrest, focusing its ire mostly on Canada so as not to get in the way of trade talks with the U.S.

But the Chinese government will not budge from its core commitment to its “Made in China 2025” agenda, in which Huawei will play a leading role in the fight for global 5G leadership.

China says developing advanced technologies is not a tool for enhancing its military capacities but rather the best way to avoid a “middle income trap” that has stagnated many emerging economies as their cost advantages erode. The way to escape this trap is to focus on leading edge innovation, beginning by adopting and adapting technology generated elsewhere but over time by developing more indigenous technology through local research and development.

While it is hard to argue with this goal, the U.S. often claims the role of the Chinese government in technology is “unfair.” China is poised to surpass the U.S. in R&D spending this year or next, and much of this comes from or is supported by the government. But is this unfair?

MIT President Rafael Reif has suggested that, rather than blaming China for spending too much government money on advanced technology, the U.S. should invest much more in the NSF, DARPA, and other government agencies charged with developing American technology. It’s also always important to remember that the internet used to be called DARPA-net, and that the “D” stands for Defense.

China also takes issue with the U.S. claim that it is a “revisionist” power determined to remake the international order and to challenge American geopolitical leadership. The Chinese government says its international strategy is (unlike the U.S.) not premised on the projection of international military force, but rather on geo-economics—developing win-win trade and investment relationships around the world, as encapsulated in the Belt and Road Initiative. As is often pointed out, China’s long history has never been about expansion abroad so much as about protecting national borders.

What is clear is that Huawei embodies the twin issues at the core of the U.S.’s tough stance on China—China’s rise as an innovation economy and its national security implications.

The two countries may well announce a face-saving trade deal next March with, for example, lower Chinese tariffs on soybeans and cars and more Chinese contracts for Boeing airliners. This would no doubt calm the market’s nerves. But it is equally clear that major underlying structural tensions will remain between the world’s two most powerful countries. The fight over Huawei may be a better indicator of how those tensions will play out in the future.

 

Editors note: Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. This post was originally published on LinkedIn, where he was named an “influencer” for his insights in the business world. View the original post here. Follow Geoff on Twitter.