COMMENT:

The arrest in Canada of Huawei's chief financial officer Meng Wanzhou, on a US Federal warrant, has upped the tempo in the technological cold war between the United States and Beijing.

Read more: Huawei Q&A: What you need to know about the Chinese giant

Sentiment in Washington DC - where I have been for the past week - was heightened by concerns that the arrest of the high-flying daughter of Huawei's 74-year-old founder Ren Zhengfei could derail the so-called "trade truce" reached between Donald Trump and Xi Jinping at the G20 meeting. Meng Wanzhou is not just Huawei's chief financial officer, but also its deputy chair.

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China has called for Meng's release, saying she has broken no US or Canadian laws, demanded Canada "immediately correct the mistake" and release her, and said China "strongly protests this serious violation of human rights."

Read more: Auckland academic sees serious fallout as Huawei CFO arrested at US request

At the time this column was filed, no official details had been released on the exact charges the US is pursuing in its Federal warrant against Meng. There have simply been news reports, informed by Canadian officials, that the US suspects Huawei broke sanctions by selling telecommunications equipment to Iran. If these allegations can be stacked up, the impact on Huawei could be enormous and lead to its exclusion from some valuable Western markets if the US reprisals against another Chinese company, ZTE, for instance, were to be replicated in the much larger company's case.

The Meng arrest might seem remote to NZ business, but the disruption has the potential to spill over in ways that will impact here.

First, disrupting the US-China 'trade truce'

Fears on this front were obvious as Asian stock markets immediately tumbled on news of the Meng arrest, as market participants took on board the potential for the trade war to reignite.

At their G20 meeting, Xi and Trump agreed on a 90-day truce where officials from both the Chinese and US governments were to discuss the issues that led to their trade conflict. Beijing would have been heartened that Trump had agreed to postpone the next round of US tariffs, due to be imposed on January 1.

The problem is that technology really is at the heart of the trade war.

The Trump Administration has used tariffs as a blunt instrument to force China to modify what the American commercial community claims are unfair practices: forcing US companies to form co-ventures to play in the Chinese consumer market and hand over intellectual property and trade secrets; and offering other backdoor assistance, which US firms allege gives Chinese companies a competitive advantage.

China denies this.

In 2015, Huawei became the world's largest telecoms network equipment provider, toppling European rivals Ericsson and Nokia, and with a reach well above its domestic competitor ZTE and South Korea's Samsung.

The arrest of Huawei's Meng Wanzhou could derail the China-US 'trade truce'. Photo / AP
The arrest of Huawei's Meng Wanzhou could derail the China-US 'trade truce'. Photo / AP

In Huawei, US companies have a competitor which is the leading maker of the networking equipment essential to telecommunications platforms, smartphones and the internet. But as well, it is also China's biggest investor in intellectual property development and patenting, and considered by many digital services companies - including NZ's Spark - to have produced superior and cost-competitive technology to competitors.

If China decides to retaliate, it could get ugly by putting a spanner in the trade talks, with a resulting impact on global economic growth.

Second, Huawei's commercial operations in New Zealand

Huawei has developed strong commercial partnerships in the New Zealand telecommunications sector. It was an early investor in 2Degrees and subsequently formed a strong relationship with the dominant market player, Spark.

Spark CEO Simon Moutter has good reasons to want to partner with Huawei to develop a 5G network, which is necessary as New Zealand - like nations worldwide - moves to greater use of artificial intelligence and the Internet of Things. This has been effectively blocked by the Government Communications Security Bureau (GCSB).

Huawei's existing footprint in New Zealand, however, is strong. It has partnered with Spark to develop its existing 4G telecoms network; is invested in a co-venture Innovation Lab with Spark; markets Huawei phones, which are popular in New Zealand and number three internationally behind Samsung and Apple for handsets sold; and also plays a good corporate citizen role through sponsoring sports teams like the Wellington Phoenix.

It has been thought Huawei would still have a valuable business in New Zealand.

But the US Commerce Department blocked Huawei's smaller rival ZTE from buying vital parts from US companies for months because it had exported to North Korea and Iran. Trump restored access after ZTE stumped up a $US1 billion fine, replaced its executive team and agreed to embed a US-chosen compliance team in the company. But it caused severe disruption for the carriers that ZTE supplied.

If the US can prove Huawei has broken sanctions against Iran, a ban on Huawei would have a bigger impact because its equipment is more widely used around the world.

Third, NZ's role in the Five Eyes Club is more visible

There is a strong narrative in Washington DC that China's technological superiority in particular sectors is seen by intelligence agencies as posing security risks.

New Zealand is very much a member of the Five Eyes intelligence sharing alliance, with the US, Britain, Australia and Canada.

The GCSB has already taken steps to block Huawei from joining with Spark to develop its 5G network, saying it posed a "significant network risk". While the GCSB has been at pains to say its decision is independent, New Zealand's role in Five Eyes is mentioned in most news reports on the Huawei clampdown.

Australia has also banned Huawei from working on its fifth-generation network, joining the US and NZ. Britain and Canada are expected to follow suit.

But New Zealand's ability to fly under the radar on such security initiatives is gone.

Fran O'Sullivan has been in the US with the NZ US Council, where she chairs the advisory board. This column is her personal view.