DC DISPATCH-Located 20 to 30 minutes away from downtown Shanghai, China, Pudong is the city’s most industrialized and developed suburb, its streets lined with office buildings, hotels, and other commercial real estate.
Its most infamous address is 50 Daotong Lu, a place where members of the media risk arrest by getting a photograph of the building. This twelve-story high rise houses Unit 61398, a group of elite Chinese hackers working for the People’s Liberation Army (PLA), the armed forces of the People’s Republic of China.
In May of 2014, five of its hackers—Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu, and Gu Chunhu, among others known and unknown to the grand jury of the Western District of Pennsylvania (WDPA)—were indicted for hacking or attempting to hack six American companies during the eight year period from 2006-2014.
The infiltration occurred in a diverse array of American energy, manufacturing, and labor giants, namely Westinghouse Electric Co. (Westinghouse), SolarWorld, U.S. Steel Corp., ALCOA Inc., Allegheny Technologies Inc. (ATI), and the Allied Industrial & Service Workers International Union (USW).
The case was referred and prosecuted by the U.S. Department of Justice’s National Security Division Counterespionage Section, along with the U.S. Attorney’s Office for the Western District of Pennsylvania.
Huawei Technologies Co. Ltd. is a Chinese multinational technology company headquartered in Shenzhen, Guangdong, China. It specializes in telecommunications equipment and produces consumer electronics like smartphones—and is a trusted partner of the Chinese government for surveillance of its citizens and foreign consumers of its products, as well.
In the past few years, the Chinese government has increased the spending and scope of its programs for internet surveillance, and for the creation of the social credit system.
Huawei Tech. is an instrumental player for those things.
The social credit system aims to have an algorithm in place that ranks all citizens by reputation. Penalties for poor marks include travel bans, exclusion from hotels and educational institutions, slow internet speed, and exclusion from some educational institutions.
While one can argue that the U.S. government engages in similar behavior and that we have a similar credit system in place, the essential difference lies in the fact that the U.S. credit ratings are based solely on financial behavior. The Chinese social credit score includes both financial and personal behavior—so reportedly (the algorithm is of course secret) one’s score could go down if photographed at an anti-government protest, or go up if one is reported to the authorities observing an Uighur practicing Islam or a Falun Gong doing exercise.
A warrant approved by an uninvolved third party (a judge or magistrate) to obtain information about internet surveillance is allowed here. For example, Americans are allowed to dispute inaccurate information that appears on their credit report, and most negative debt is reportable for seven years before dropping off the radar by prolonged good financial behavior.
Meanwhile, if a student has poor credit, he or she would still have access to Stafford Loans and financial aid, softening the penalties for financial failings, while all along the credit scoring companies of Equifax, Experian, and TransUnion operate independently of governments.
By contrast, as the Chinese make surveillance and implementation of its 2020 social credit system a priority, the proxies that are tasked with executing the directives cannot be viewed as neutral parties but partners of the government.
Huawei is one of those partners. It is a vertically integrated company that is the second largest manufacturer of smartphones in the world, behind only Samsung. It is also is a manufacturer of 5G equipment, which ends up in the hands of millions of people in Asia and Europe.
The founder of Huawei is billionaire Ren Zhengfei, and his company was instrumental in building the communications infrastructure in China.
The Huawei brand is very popular across the continents of Asia and Europe and has grown its moderately priced smartphone business as fewer carriers compete in that space.
However, Huawei has failed to break into the U.S. markets, as most Americans now buy their phones from their cell carriers (Sprint, Verizon, AT&T). Meanwhile, Chinese consumers are switching out of their Apple iPhones to Huawei smart phones, a trend confirmed by Apple’s declining share of the smartphone market; and both are parts of the casus belli of the escalated trade war between Beijing and Washington.
In terms of “fairness,” which President Trump frequently cites as the raison d'être for the rift, if a former U.S. military commander had created a telecommunications infrastructure company, I can unequivocally state it would not be able to do business in China.
Zhengfei was formerly the deputy director of the PLA, and one can safely assume that his ties with it—and so with the Chinese government in Beijing—are intact.
There are no “private companies” in the communist state of China, despite the nation’s aggressive capitalization since its entry into the World Trade Organization (WTO). The nexus between the state’s own protectionist policies and agendas—which have, among other things, erected trade barriers for imports—have made it increasingly difficult for U.S. companies to break into the Chinese marketplace.
Many companies have tried to take advantage of the Mergers and Acquisition (M & A) markets, as with the attempt to marry the Huiyuan Juice giant with Coca Cola, but with disappointing results. So too were the attempts to do business in China’s vast consumer market, as Walmart tried.
Many American companies have also found the lack of respect for trademarks a threat to the very spirit of the West’s entrepreneurial MO. Chinese intellectual property theft abounds, spiting creative sovereignty and the creator’s entitlement to profit from it.
And then there is currency manipulation from Beijing.
I can’t call myself a Trump supporter, but the president has the moral authority here. His decision to ban Huawei products from the United States and restrict U.S. companies from supplying components to it is the correct one. Other countries such as the UK, Japan, Australia have also publicly expressed concerns or taken steps to block or restrict Huawei’s role in the development of their national telecommunications infrastructure.
The Department of Commerce’s follow-up decision to allow a 90-day grace period for U.S. companies to continue business with China was generous, and likely in response to the market’s volatile reaction to the trade war, but the president should stay the course.
While hoping for mutual agreements that would make equitable the current trade and currency asymmetries created by China, eagerness to make a deal should not be at the continuing expense of National Security. Both in terms of treasure and the theft of American trademarks and trade secrets alike, the United States has been on the losing end of a WTO partnership to a surveillance state that exploits the weaknesses of good faith agreements on our end, made vulnerable and exploited by bad faith and even criminal business practices on theirs, as enabled by agencies like Unit 61398 while companies like Huawei have long since been engaging in corporate espionage—in full knowledge and encouragement from the Chinese government itself. Indeed, under China’s 2017 National Intelligence Law, any Chinese company is obligated to hand over customer data—or, most likely, just about anything else—if the government asks.
As an American who lived and studied in China for close to two years, I witnessed firsthand how there is little space, if any, between state and corporate enterprise.
The partnership has fueled growth for decades now, but that is not to commend the symbiosis. It has thrived by shutting off competition and by theft, and I do not see the Chinese government transitioning to a free market system anytime soon, one that rewards the fittest products from wherever they are made – particularly if they are Made in America.
The president’s hardball approach to this problem may seem too hard, especially since the American companies meant to benefit are taking their own hits. However, the problem has grown to the tune of billions of dollars in lost opportunities and revenues for our own growth, while China is awash in renminbi and relishing the prospect of surpassing the United States' GDP and eclipsing the dollar's reserve currency status.
Good for them; but it’s only fair to play ball without having our arms tied behind our backs while getting pickpocketed.
I stand with America in this trade war, no matter who is president.
(Sara Corcoran writes DC Dispatch and covers the nation’s capital for CityWatch. She is the Publisher of the California and National Courts Monitor and contributes to Daily Koz, The Frontier Post in Pakistan and other important news publications.) Edited for CityWatch by Linda Abrams.