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  1. World
6 December 2018

Why the arrest of a Huawei boss puts US-China relations in jeopardy

The chief financial officer of the world’s largest manufacturer of telecommunications equipment was arrested in Canada at the apparent request of US prosecutors.

By Nicky Woolf

On Saturday night, Chinese president Xi Jinping and Donald Trump sat down in Buenos Aires for dinner as part of the G20 summit in Argentina. Despite the US president’s aggressive campaign language, the two have always seemed to have a cautiously cordial personal relationship, and the meeting ended in the agreement of a 90-day moratorium on new retaliatory tariffs between the two countries, signalling that an end might have been in sight for the burgeoning trade war between the US and China.

But it turns out that at the same time as the two leaders were tucking into their Argentinian steak, a high-ranking Chinese business leader, Meng Wanzhou, the chief financial officer of telecoms giant Huawei, was being arrested in Canada, apparently at the request of US authorities seeking her extradition. Chinese authorities have spoken out sharply against the arrest, calling it a human rights violation.

The reason for Meng’s arrest has not been released. In a statement released on Twitter, Huawei said that Meng faced “unspecified charges in the Eastern District of New York.” But the company, which is the world’s second-biggest manufacturer of smartphones (the largest is Samsung, with Apple in third place) and the world’s largest manufacturer of telecommunications equipment, has been under investigation for possible violations of Iran sanctions since April, according to the Wall Street Journal.

The problems US authorities have described with Huawei’s business practices are not necessarily overblown. In the UK, a government report signed off by GCHQ, the British spy agency, said that it could only offer “limited” assurances that the company’s hardware, which is a key part of the critical telecommunications infrastructure used by BT and Vodafone, did not have critical vulnerabilities that could facilitate Chinese spying.

In the US, federal agencies have been barred from purchasing Huawei equipment since August 2018, and the governments of New Zealand and Australia have followed suit, saying that the company poses “significant security risks”.

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The news of the arrest, which was not made public until Thursday morning, is likely to torpedo any chance of a thaw in relations between the world’s two largest economies, and stock markets dropped sharply in response to the news.

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During the 2016 presidential campaign, Trump used China as a core campaign slogan – the Huffington Post made a terrific and hilarious video illustrating just how often he banged that drum. He even went as far as saying that China was “raping our country”. But once in office, Trump’s China policy was less coherent. President Xi was present at his first international summit as president; a bizarre meeting took place in which Trump ordered bomb strikes against Syria while sharing chocolate cake with the Chinese leader. Whatever the rhetoric, the two appeared to be developing a cordial personal relationship.

But that relationship turned frosty as Trump began imposing trade tariffs. The US now has $250bn in tariffs on Chinese goods being sold in America; over half of Chinese imports to the US are now subject to 10 per cent tariffs, according to the BBC. In response, China accused Trump of starting “the largest trade war in history,” and imposed $110bn in retaliatory tariffs on American imports, some of them strategically targeting goods from Republican districts.

On Saturday at the G20, however, things appeared to be thawing slightly. Trump and Xi agreed to a 90-day truce during which no further tariffs would be levied – Trump had previously hinted that he might raise the tariffs from 10 to 25 per cent – in exchange for an agreement by China to purchase “a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries,” the White House said in a statement.

But Meng’s arrest makes that truce look very shaky indeed. Especially given Trump’s bull-in-a-china-shop approach to diplomacy, it is possible that the trade war could quickly resume and escalate.

It is unclear whether Trump was aware that the arrest was about to take place when he sat down to eat with Xi, but the timing makes it seem like an intentional act of humiliation which may push the Chinese into a strong response. If that happens, it seems likely that Trump will return to his planned 25 per cent tariff response, or even more drastic measures.