The House Intelligence Committee today recommended that the U.S. government not do business with two Chinese firms, Huawei and ZTE, and it urged U.S. companies not to buy their equipment. The Committee alleged that the two firms pose a security threat to this country. This could be the trip wire that sets off a trade war, and it deserves more attention than it is getting.
To begin with, Hauwei and ZTE are both world-class companies, with operations in the U.S. and over 100 other countries. Huawei is the world's second-largest maker of telecommunications equipment and a major customer of dozens of U.S. firms. ZTE makes cell phones and related products for AT&T, Sprint, Verizon, and T-Mobile, among others. The linkages are so tight between these firms and their U.S. suppliers and customers that it would be easy for Huawei and ZTE to retaliate for the blackballing.
The House panel charges that the two Chinese firms are so heavily dominated by the Chinese government that they cannot be trusted with critical elements of the U.S. telecommunications infrastructure. Most of the evidence in being withheld on security grounds, but the allegations are plausible. In most advanced countries, the governments and their telecom companies are in bed together. U.S. telecommunications companies are known to collaborate with the government in wiretapping, and our security agencies are not likely to welcome outsiders to the party.
One complication is that thousands of U.S. jobs are at risk. Many capital-equipment makers count Hauwei and ZTE as customers. ZTE recently announced a $2 billion expansion of its U.K. operation, and Prime Minister Cameron rolled out the red carpet, touting the boost to the U.K economy. Huawei and ZTE can offer the kinds of jobs that most countries want, and if the U.S. pressures Cameron to call off the deal with ZTE, some other country would welcome them with open arms.
Cyberwarfare and protection of intellectual property are sensitive issues, and they certainly make technology trade with Chinese firms difficult. But igniting a trade war is not the answer. The topic should be at the top of the agenda in any bilateral trade negotiation between the U.S. and China. Another complication right now is presidential politics. I am sure the two campaign teams are hard at work today, each trying to position itself as "tougher on China" than its opponent.
But the possible consequences of today's announcement are serious. Unfortunately, they also include a nightmare scenario.