While US actions against Huawei may not be politically motivated, China finds it difficult to believe they are not

First, there is a marked difference in which the arrest of Huawei CFO on violation of Iran sanctions was covered by the Chinese media. The papers unequivocally termed the arrest and the lawsuit as “politically motivated”, caring little about confirming or denying the veracity of the charges themselves. This perspective is rooted in China’s own view of its law enforcement institutions, which are naturally assumed to be another division of the Party-controlled government, and do not have as watertight separation in powers as is the case with judiciary, prosecution and the government in the United States. Domestic lawsuits against powerful politicians, civil servants or businessmen in China are initiated by the public prosecutors on the directions or with the permission of the executive branch of the government, and domestic courts actively fast-track such cases. Rarely if ever, has a verdict been given by the courts in China, which contradicts the government’s stance in a public litigation. Given this paradigm, it is difficult for the local authorities in Beijing to believe that the US government hasn’t pushed its own law enforcement institutions to use the arrest of the Huawei CFO as a bargaining chip in the trade discussions.

Therefore, any subsequent clarifications from the US authorities, that the prosecution of Huawei on intellectual theft and sanction violation charges are separate from the issue of trade dispute, is unlikely to be accepted by the Chinese authorities.

Second, the actions taken by the US have failed to address China’s concerns that US is using “intellectual property rights” as an excuse to block China’s rise. First, as several Chinese commentators have recently begun to point out, US has no right to lecture China on intellectual theft, when its own industrial revolution was founded on outright industrial espionage. These claims are true – as economic historian Doron Ben Atar points out in his book Trade Secrets. In the 1780s-90s, American inventors were easily getting patents for technology pirated from abroad. Samuel Slater, the father of US industrial revolution, had a very different reputation across the Atlantic. He was called “Slater the Traitor” in Britain, for having memorized and passed on the design of Arkwright spinning mills to American businessmen in Rhode Island, helping establish the first textile mill in the United States. Furthermore, this piracy was not being carried out in the absence of any law to regulate it. Britain already had, in the late 18th century, laws in place to limit the export of critical technology and skilled workers.

Therefore, such an illicit transfer of technology was being carried out in violation of the existing laws in Britain. Moreover, British themselves were guilty of stealing silk weaving technology from the Italians in the 18th century, when a British textile worker John Lombe sketched copies of machines in silk spinning establishments of Italy, which was forbidden by law at the time. As per this argument, every emerging power has either tried to circumvent the existing intellectual property laws or has tried to clandestinely overlook technology theft from abroad by its businesses.

Furthermore, a divergent view on what constitutes a technology theft once again raises a roadblock for a successful resolution of trade conflict. In particular, Chinese patent laws, even for domestic firms, tend to have a more lenient view towards the degree of protection afforded to innovation. Indeed, as I pointed out in my previous article on Innovation in China, the threat of copying itself had a big role to play in spurring the pace of technological acceleration. The absence of strict non-compete clauses in most Chinese technology giants, allows bright people to move from one tech firm to another (as they do in the Silicon Valley), carrying with them ideas from the old firms, over which they improvise in a new place.

Third, the recent round of trade talks is unlikely to have assuaged the anxieties of US and its allies around the suspicions of espionage by Chinese technology firms. While there have been no proven cases of Chinese intelligence services using technology firms operating in foreign countries to collect sensitive information about their citizens and governments, the culpability of such an act is hard to deny. As I have noted earlier, the close ties of Chinese firms, even the private ones, to the Communist Party, and the requirement to keep an active division of the Party operating within the firm to align the incentives of the firm and state, remains at the center of this suspicion. Therefore, even though the Chinese government may not be using its technology firms to gather intelligence on other countries, that it can accomplish it very easily should it desire to, continues to remain a problem towards any normalization of ties between US and China. The National Intelligence Law of the People’s Republic of China (2018 Amendment) sits at the center of this objection. In particular focus is the Article 7 of this law, which states that:

On the face of it, a stipulation for organizations (firms) to cooperate with intelligence agencies in gathering intelligence is not unique to China. In fact, most other nations in the world, including the US, have similar laws which require firms to cooperate with the intelligence agencies to gather information that could be sensitive to national interest. However, in China’s case, there are two open areas in the legal language, which could allow the state, in theory, to use Chinese technology firms to conduct active espionage. First, there is no clarity around the conditions under which the intelligence agencies could make a request to Chinese firms to cooperate with intelligence gathering. Ergo, it is not clear whether this intelligence gathering likely to be investigative, in order to defend the country, or something similar to a persistent surveillance without a warrant? Secondly, unlike US, the firms in China do not have enough safeguards to deny intelligence gathering requests which they could deem excessive. For even though they could in theory file complaints protesting against intelligence gathering requests if they feel them to be unnecessary or risky to their corporate reputation abroad, they would be limited in the legal assistance provided to them. The 2016 law on regulations of law firms, strictly constrains law firms from undertaking cases involving national security.

Finally, another aspect that could prevent any reconciliation between US and China in the longer-term is the extraordinary rise in China’s leadership in institutions governing the regulation of new technology. To understand why that is important, we must consider the concept of hegemony, where the most powerful nation of the day does not just exert its influence through military and economic clout, but also by shaping international multilateral institutions in ways that serve or promote its own interests. In particular, this strategy manifests itself through the hegemon taking the final call in setting the standards for multilateral organizations that would define the protocols through which countries interact with each other. This is indeed what US did in 1944 when it took over from the UK as the global hegemon, establishing the IMF and the Bretton Woods system which puts the US Dollar at the center of the world’s financial system. Earlier, the British had done something similar when international maritime trade was emerging as a key channel for accumulating power and influence in the world- international sea laws today derive their origins from the British maritime laws of the 18th and 19th centuries.

China’s growing clout in the standard setting bodies for international telecommunication can be seen as a part of that same trend. Currently, Chinese firms and government research institutes hold the largest number of seats in International Telecommunication Union’s (ITU) 5G-Standard setting bodies. Furthermore, Houlin Zhao from China, is the first from his country to become the Secretary General of ITU; he was unanimously elected to this position in 2014. As a specialized agency of the United Nations, a key role that ITU plays is in coordination and development of worldwide technical standards. In this capacity, it has a vital part in defining the standard procedures, guides, testing methods and specification for telecommunication technologies, and thus has an important say in determining the validity of patents.

Furthermore, Chinese firms already hold 10 percent of the patents for technologies and equipment essential for operating 5G network, a share that is likely to rise as Chinese members of the ITU decide what constitutes a valid patent. This means that sanctions on Huawei and other Chinese telecom giants notwithstanding, their control of the regulatory bodies on telecommunication is likely to keep them profitable, as the users of such patents are likely to continue paying them royalties.

It is not very tough to understand why China’s pre-eminence in setting the standards for 5G technology should be a sticking point for the US-China institutional conflict. By 2020, as per the Bank of America, there will be 30-40 billion connected devices operating on 5G networks and over 200 billion sensors capturing data about people, which could possibly be stored and disseminated as per the protocols agreed upon by the ITU today. Furthermore, over 50 percent of US homes are likely to have at least one smart home device operating on 5G, by the middle of the next decade- a level of control that closely resembles how internet, maintained and coordinated by US-based ICANN, emerged as a ubiquitous presence in our lives a generation ago.

Given that such a power struggle now looks inevitable, the question before other countries then is, if we seem to be hurtling towards another Cold War, how should we position ourselves?