Shades of the Yellow Peril

The decision this week by the US House Committee on Intelligence that China’s Huawei and ZTE telecommunications companies pose a threat to US national security has sent yet another shock wave traveling through Chinese companies seeking direct investment in the United States.

Despite the fact that China’s investment in the US is minuscule, two previous high-profile investments, both less strategic than political, have caught flak from government committees. In the first, in the middle of the last decade the Chinese National Offshore Oil Company, or CNOOC, sought to acquire Unocal Oil Co but was turned back by the House Committee on Foreign Investment.

In the second, House members sought during the Clinton administration to block Hong Kong’s Hutchison Whampoa Ltd. From running the loading, unloading and storage of cargo at ports along the Panama canal because of owner Li Ka-shing’s alleged connections to the Communist government in Beijing, a proposition that would be laughable to anyone with knowledge of Li’s operations.

Li himself told reporters at the time that "We are not even the largest operator in Panama, compared with some of the Americans and Taiwan operators. We are running a container port business which has nothing to do with the operation of the Panama Canal."

The House committee report on Huawei and ZTE, the result of a year-long probe, recommended that US government computer systems exclude any equipment sold by the two firms, and also recommended that the Committee on Foreign Investment block any domestic acquisitions, takeovers or mergers involving the two companies.

The committee’s findings do not prevent either Huawei or ZTE from doing business in the United States, although the committee report warned US companies against doing business with either, which effectively makes it extremely difficult for them to do so.

In the report, released by the Republican chairman Mike Rogers of Michigan and his Democratic counterpart, C.A. Dutch Ruppersberger (D-MD), the committee highlighted the interconnectivity of US critical infrastructure systems and warned of the “heightened threat of cyber espionage and predatory disruption or destruction of US networks if telecommunications networks are built by companies with known ties to the Chinese state, a country known to aggressively steal valuable trade secrets and other sensitive data from American companies.”

The decision, however, smacks of economic nationalism on the part of the US government and appears to have more to do with campaign politics at a critical electoral juncture.

“…(M)any Chinese executives believe the United States is unwelcoming of Chinese investment, even though the vast majority of Chinese investments in the United States have either been approved or have not required any approval,” wrote David M. Merrick, managing director of the Carlyle Group, in a recent paper for the Council on Foreign Relations.

China's global outward investment remains extremely low, lower than even than that of Ireland and Singapore, Merrick wrote. Historically, the United States has garnered about 15 percent of total global investment flows, yet currently it receives only 2 percent of China's.

Founded in 1987 as a private company owned by its own employees, Huawei has grown into one of China’s most successful concerns, building telecoms networks for companies both inside and outside of China. According to its website, it has more than 140,000 employees, 46 percent of whom are engaged in research and development. It also operates 20 R&D facilities not just in China but in the United States, Germany, Sweden, India, Russia and Turkey.

"Huawei is a business in the business of doing business," William Plummer, Huawei's US vice-president of external relations, told the state-owned Xinhua news agency in reaction to the committee report. He called the report an “unfortunate political distraction from very real issues related to cyber vulnerabilities on a global basis.”

Huawei made "$32.4 billion in revenues last year across 150 different markets, 70 percent of our business outside of China. Huawei is not going to jeopardize its commercial success for any government, period," he said in remarks carried by the state-owned China Daily newspaper.

ZTE issued a formal statement that “The committee is operating under a broad assumption that any Chinese company must have 'ties' sufficient to enable China's government to direct or control business operations, even including authority to require access to Chinese companies' telecom infrastructure equipment for purposes of espionage and sabotage of critical US telecom infrastructure.”

ZTE, according to the committee, “has been forthcoming in responding to this assertion. China's government has never requested such access to ZTE equipment; and ZTE expects China's government never to do so. If China's government was to demand such access, ZTE would be bound by US law."

ZTE’s case is a bit more problematical as a Chinese government-owned enterprise and because of the fact that it was caught in an alleged attempt to bribe former Philippines President Gloria Macapagal Arroyo and her husband, Miguel to obtain a US$323 million contract to build a government-managed national broadband network in 2007. In addition, Telenor, the Norwegian mobile operator, banned ZTE from "participating in tenders and new business opportunities because of an alleged breach of its code of conduct in a procurement proceeding” during a five month time span ending in March, 2009. However, the Telenor group reportedly has begun to reconsider working and contracting with ZTE, the world’s fifth-largest telecoms equipment maker.

Hong Kong-based economist Enzio Von Pfeil noted that while foreign investors apparently are not allowed to invest in America’s defense and communication industries, “By investing more and more directly in America, China is just following the traditional model followed by all countries: first, they export, and then they invest directly in this original export destination, i.e. in the USA. Exports pave the way for direct investments.”

“Are direct investments more about business or about politics?” he asked. “It depends on the political climate in the host country -- the country into which the direct investment flows. For instance, China is host to America's Coca-Cola plants. As we observed. every host country has laws which disallow certain direct investments by foreigners. The national defense industry is an obvious case in point. Witness the headline space grabbed by the EADS/ BAE merger talks. But in my book, Trade Myths, I do foresee another form of political protectionism rearing its grizzly head: "host country protectionism".

This is being played out while we speak: Japanese car factories in China are cutting back production because Chinese consumers are boycotting the purchase of Japanese cars - courtesy of the Diaoyu Islands' spat between both countries! My concern is that if Mitt Romney keeps chiding the Chinese as America's enemy, China very well could hurt the operations of American multinationals so successfully operating in China. Equally, Mitt Romney could well also fan an anti-Chinese mood in the United States, thereby hurting Chinese operations in America itself.”