Trump and Xi Jinping are now in a 90 Day Truce, but Tech might drive the Trade War to a whole new level. (Wikipedia Commons, Public Domain)

President Trump

Deep Dissection: Tech Might Break USA-China Trade-War Truce

All The Tech Controversies You Missed During The Holidays

January 10, 2019

With Donald Trump and Xi Jinping entering a 90-day “Trade Truce” on December 4, 2018, both countries as of the publishing of this article have had a full third of that term to rethink their trade strategies and potential cooperation plans with each other.

However, instead of this 90-day period allowing civil negotiations respecting the images of both the parties involved, many alarming and politically motivated events have occurred in just December alone that paint both parties in a more negative light.

Controversies such as the arrest of Huawei’s CFO in Canada, the injunction violations of Apple products in a loss to a Qualcomm patent-infringement lawsuit, the USA’s involvement in deterring other countries from using Huawei’s telecom equipment amid fears of spying, and China’s in-turn retaliation promoting Huawei products and discouraging Apple products, have all left both countries practically more cut-throat towards each other than before the beginning of the Trade Truce.

In the latest article in my Deep Dissection series, I’ll be looking at the complications of a full blown trade war. As usual, it is best to understand the context of each controversial event these past few months and the ramifications they have between the relations of both countries as a whole.

Blind patriotism to either the United States or China helps many in the general public believe that the reasons for the war is strictly a hero/villain narrative instead of the vastly complex and political chess game that is really occurring.

Huawei and Telecom Concerns

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Huawei’s had problems with the United States market for countless reasons. (https://commons.wikimedia.org)

Throughout the end of November and continuing through December, as manufacturers and telecommunications companies continue preparations for the eventual rollout of 5G cellular data speeds, many nations have had to consider which of these broadband companies will be their providers of 5G connectivity. The major equipment providers for 5G technology are Qualcomm, Ericsson, Intel, Nokia, and Huawei, with Huawei being the most aggressive of the five, having dreams of being the global leader of 5G capabilities.

Chief Executive Officer of Huawei Technologies Co., Ltd. Father of Meng Wanzhou. (Obtained From Huawei Media Kit)

However, Huawei has now been ruled out of several countries for supplying local telecom companies with the 5G capable equipment as the United States is warning allies about the Privacy Insecurities that the equipment might have. The U.S.’s and other allies’ fear is that the connections between Huawei’s company CEO Ren Zhengfei and the Chinese government are too close to consider the business practices of Huawei to be truly independent from government influence.

The point in case that the U.S. has used to persuade other allies in addition to its own mobile carriers from using Huawei equipment is that the equipment and data provided could potentially have backdoors through which Americans or other citizens of other countries could be spied on by the Chinese government.

This fear intensifies as the future of “Smart Home” and “Smart Things” heavily rely on this future 5G connection to be stable and secure, and despite no exact evidence of Huawei’s foul play, the US considers it to be a national security threat. Other allies like Australia, Japan, and some locations in Europe like Britain and the company that previously praised their efforts, BT.

Where the U.S. plays into this is that the methods for discouraging Huawei and other Chinese telecom equipment in both the U.S. and in other foreign countries might signify a more political reason than the ones that have been making the cover pages, especially with Donald Trump’s continued effort to promote American businesses and products over that of China’s.

Is this all just another measure to ratchet up the trade war?

What further adds validity to this question is that the U.S. has gone out of its way to warn about the security vulnerabilities of already pre-existing Huawei equipment that have been used to equip areas with 3G and 4G , and the US has extensively promoted using other telecom equipment in foreign countries, even considering subsidizing the costs.

If Huawei has operated since 1987 in 170 countries and they all haven’t had issues like the ones now arising, one must question if the problems have been extensively buried and are just now coming to light exclusively by the hand of the U.S. government,  or just unverified ideas blown out of proportion by fear-mongering aggressive tactics by the U.S. to put American businesses first.

The important thing to remember here is that Huawei is a company that China is very proud of (some examples of how proud Chinese citizens are can be viewed in the “China’s Retaliation” section), and to have a major blow like this directly from the US elevates the trade war to new levels, whether founded in fair scrutiny or not.

 

Apple VS Qualcomm

The newest iPhones aren’t effected by the Qualcomm injunction. (Obtained from Apple Newsroom)

So tensions are raised by the US on the basis of Huawei’s technologies, but the reverse could be said for the U.S.’s crown-jewel of a tech company, Apple Inc., though the situation is slightly more political and complicated.

On December 11, Snapdragon Chip Maker and 5G Telecom Competitor Qualcomm Technologies Inc. sued Apple in China over violation of its patents, the Chinese courts ruling an injunction. The patent in question references a touch-screen device able to scale photos, which rules out the iPhone 6s through last year’s iPhone X. (The current generation of iPhones were not out by the time this injunction was filed, but further reports state that Qualcomm is looking for injunctions against the current generation of iPhones as well.)

Apple’s solution to continue selling their products in China was to circumvent the patent infringement via an iOS 12.1.2 update removing the functionality that proved to be causing them infringement issues.

While the patents may indeed have been violated, it’s hard to believe that the first resort was a full injunction, and not some sort of cash settlement. What this may mean is that China wants to have a more even ground with the U.S. in this trade war, and blocking Apple sales within the country is the start of that retaliation in response to Huawei and ZTE being blocked in the U.S. and European countries.

What makes this case even more relevant and much like a mirror to the Huawei situation in the first section is that on December 20 similar injunctions were awarded to Qualcomm in Germany against the iPhone product line violating the patents.

Considering that most of these events took place during the start of the 90-Day Truce, behind the scenes both countries are perhaps fighting even more aggressively than before. This Truce seems to not really be solving anything because both countries are still at each other’s throats.

 

Huawei’s CFO Arrest   

                     

Chief Financial Officer of Huawei, Meng Wanzhou, was arrested in Canada per request of the US. (Obtained from Huawei Media Kit)

In a statement that is really not so bold when backed up, Huawei’s CFO arrest in Canada is the most influential event in probably this entire trade war. On December 5, 2018, Meng Wanzhou was detained in Vancouver, Canada, by request of the United States on allegations of Huawei violating trade sanctions with Iran. The allegations behind the matter are fairly complicated, so here are the basics.

Huawei bought shares of a company called Skycom located in Hong Kong in 2009 and owned at least a majority share and were able to influence operations of Skycom until around 2012/2013, with Ms. Meng stating that the shares of Skycom were sold sometime before that. 

The reasoning for buying the shares of Skycom were so that Huawei could monitor the compliance of the company doing business in Iran, with Ms. Meng operating on the Skycom board of Trustees. Once Huawei believed that Skycom was capable of operating under the compliance laws on its own, they sold the shares and Ms. Meng quit her job.

Links between Huawei and Skycom are officially just as trade partners, though very close ones. In 2010 Skycom made an offer with Mobile Telecommunication Company of Iran to sell [icon name=”eur” class=”” unprefixed_class=””]1.3 million of HP equipment.

 

 

According to an article by Reuters, “Huawei said neither it nor Skycom ultimately provided the HP equipment; HP said it prohibits the sale of its products to Iran.” This is ultimately both affirmed and also contradicted by a 16 page PowerPoint stating that Huawei follows strict compliance rules in whatever countries they do business in and clarifying the business relationship with Skycom.

However, several banks in the US like HSBC began to worry that their business arrangements and payments to Huawei would actually be passed on to Skycom to circumvent the trade sanctions in Iran. Ms. Meng reportedly had to try to stress that Skycom and Huawei were seperate entities, and not the same, but the prosecution further argued that they are a single entity conducting business in Iran, and that the cooperation on display is, as the request for the arrest by the US states: 

Skycom operated as Huawei’s Iran-based affiliate in order to continue to obtain banking services.”

— US Prosecution

 

 

 

 

 

 

 

 

 

The results of Ms Meng’s trial will be updated into this article whenever the final verdict is reached, regardless the state of affairs between China and the United States after this conflict is expectedly tumultuous.

China’s Retaliation

 

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Companies in China have been offerings incentives to employees owning Huawei products as a way of showing their support during the detainment of Ms. Meng. (https://commons.wikimedia.org)

As a result of Meng Wanzhou’s detainment in Canada, Chinese citizens were outraged.

That fire even burned up the chain to executives of major companies, and in a move to show support for Huawei and the Meng family, starting granting incentives to employees using Huawei handsets.

Incentives ranged from subsidies up to 500 yuan of their purchases, from other companies like Chengdu RYD Info. Tech. offering 15% subsidies off of their Huawei handset.

Other companies actively were warning employees about buying Apple devices, some even punishing their employees, causing divisiveness around the Chinese public.

Some viewed the acts of patriotism necessary under the recent circumstances of the trade war and the U.S./Canada’s detainment of Meng Wanzhou.

In more drastic measures, the number of Canadian citizens detained in China has risen to reportedly 13, and this combined with warnings from several of the patriotic companies from China make this issue seem more warlike than ever before.  

While two of the detainees, according to Zhang Jun, the prosecutor general of China, have put China’s national security at risk and “without a doubt” violated the law, the other 11 seem to be at the wrong place at the wrong time with all of these trade war tensions boiling up.

The U.S. even distributed a travel warning to any Americans planning to go to China to increase caution at the extra enforcement of local laws.

What adds insult to injury, and from China’s perspective invalidates the case against Meng Wanzhou, is the fact that U.S. President Donald Trump has said that he could “intervene” in the trial against Ms. Meng if it served to reach a trade deal between China and the U.S. A quote from a CNBC article has him stating,

Pullquote Photo

“If I think it’s good for the country, if I think it’s good for what will be certainly the largest trade deal ever made — which is a very important thing — what’s good for national security — I would certainly intervene if I thought it was necessary,””

— US President Donald Trump

From Trump’s quote, it could be easily misconceived (or correctly assumed, who knows at this point) that chess-game politics are playing a larger role into the arrest of Ms. Meng than the actual accusations that she is brought upon in Court.

There is no doubt that China’s retaliation to the arrest of Ms. Meng will be putting a damper on this trade truce, with hostility rearing its ugly head from both sides.

Tim Cook’s Letter to Apple Investors

Tim Cook sent out a letter to investors explaining lower than expected sales of the iPhone product line. (Obtained from Apple Newsroom)

In a recent letter sent out to Apple Investors, Tim Cook confirmed less than expected sales and revenue from the iPhone product line, citing that the movements into markets like “Greater China” proved to be particularly difficult.

While this isn’t the entire problem, they still had to take a whole $67 billion from their Market Cap. You can read the full letter here.

Undoubtedly, holiday sales in China have most likely been difficult due to all of the controversies and rising tensions of the trade war, and this letter represented a major blow to one of the U.S.’s crown jewels of industry.

While the one of the major goals of the trade war is to open up China to more American businesses, it doesn’t help if the Chinese citizens don’t seem too interested in their products in general.

This isn’t to say that it isn’t likewise for Huawei, as they’ve completely left the U.S. market on accounts of it being hostile for the time being, but Apple being unable to penetrate the Chinese market leaves the U.S. desiring a change in trade relations, just as much as China is desiring a change in trade relations for Huawei to be able to enter the market.

While this 90 day Truce may have helped both Trump and Jinping come to a conclusion on how to proceed with cooperation on trade between both nations, both of these nation’s big dogs in tech are causing significant impairment in that process.

This story is still developing, and the exact effects of these events on the end agreement remain to be seen, but this is for sure:

The agreement might be harder to reach than anyone expected and more bitter when it is found.

 

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