Huawei controversy: the angst over Chinese firms is very much justified

The damaging leak of classified information from a National Security Council meeting is a matter of great significance. The UK’s telecommunications strategy and the involvement of Huawei is no longer private. There are important implications, not least those Peter Ricketts points out here. One danger is that in a weakened Brexit Britain, political infighting becomes embroiled in the proper conduct of national security matters. We should be careful not to lose our focus, though, on the substance underlying this controversy.

While it is still a matter of opinion as to whether Huawei’s hardware has technical weaknesses or is a Trojan horse for China’s security purposes, the essential issue is basically about the terms under which we engage with Chinese companies. With particular regard to Huawei, which sits at the heart of telecoms thinking around the world, the issue of engagement is as important as it would be if we were talking about military and energy security.

Rising concern about the role and activities of several Chinese firms has become widespread because China is not only a major customer and feisty competitor and partner, but also now a powerful global adversary. While the political status of state enterprises has never been in doubt, the assumption that private companies in China are private in the way that we understand the term is often mistaken.

Holding company structures and investments often mask state ownership, and about three-quarters of private firms, including the largest and also foreign joint ventures, have Party representatives in their operational management. Conflicts of interest can be assumed to go mostly the Party’s way. In the telecommunications and other sensitive sectors, these features carry an additional frisson.

Huawei has a complex ownership structure, in which the Party’s presence is conspicuous. It is also a very successful firm that aspires to monopolistic control of markets at home, where local telecommunications companies resist it for fear of being exploited, and abroad, where the issue is more about the development of an information and intelligence network leading back to Beijing.

The British government, and its peers, have to decide how and where to draw lines between the benefits of commerce and the implications for national security. The reported decision to allocate only non-core parts of the UK’s 5G network to Huawei, for example antennae, aerials and other conventional infrastructure, looks at first glance like a classic British compromise, designed to keep both the Chinese and US governments on side. It may do neither.

There is also the complex, technical issue as to whether the separation of non-core from core in 5G networks even makes any sense. Since 5G is, inter alia, about the internet of things, including military and security “things” that will relay greater and faster information, no one can be sure that such a functional separation will keep a quasi-state hardware supplier at arm’s length. The recent Huawei Cyber Security Evaluation Centre Oversight report to the National Security Adviser concluded, diplomatically, that it can “only provide limited assurance that all risks to UK national security from Huawei’s involvement in the UK’s critical networks can be efficiently mitigated long-term.” This would seem to underscore the need for continuing caution.

We can understand that cash- or budget-constrained western governments may be receptive to low prices and big discounts offered to customers by companies like Huawei, which benefits at home from protected markets, attractive financing conditions and generous subsidies. These operating conditions also contribute to wider complaints by western companies and governments about industrial policy, technology transfer, and intellectual property protection.

We would be well-advised to resist the temptation to make such narrow-minded judgment. There are signs, moreover, that some western governments are alert to the dangers. Indeed, the speed with which China angst has spread across countries and political parties in the last 18 months has been striking. Much greater scrutiny and oversight are now being brought to bear over the direct investment of Chinese companies in sensitive sectors. The volume of direct investment into the US and the EU has indeed fallen away significantly since 2016, partly because Beijing itself has cracked down on “frivolous” foreign investment, but increasingly because in tech- and military-sensitive sectors, it is less welcome.

What remained of the pro-China lobby in the United States seemed to evaporate following the release in the US of the National Security Strategy at the end of 2017 and soon after, the National Defence Strategy. Moreover, last month, the European Commission published a new EU-China strategic paper, in which it described China as a “systemic rival promoting alternative models of governance”—not quite the celebrated “competitive strategic partner” hailed at the year earlier EU-China summit.

None of this should preclude western efforts to advance and deepen trade, other commercial, climate change or peace-keeping engagement with China. Yet in matters that impinge on security, we must take care in allocating contracts or favours to companies that are close to—or represent—a party state that champions beliefs and values inimical to our own.

What the Huawei discussion illustrates is just how complicated and important the task is to establish new relationships with China as a systemic rival. We are still in the foothills, and there should be no rush to judgement on the grounds of political convenience.