As tensions continue to escalate between the United States and China, technology has become a focal point of growing bilateral competition. One of China’s top high-tech companies, Huawei, is the subject of scrutiny from competitors as well as governments across the globe, as it faces accusations of violating sanctions, stealing trade secrets, and compromising user privacy. Nevertheless, Huawei is at the forefront in the commercialization of 5G technology, the next generation of wireless networks that will power our phones, computers, and even autonomous vehicles. Dr. Scott Kennedy of CSIS explains how Huawei got its start, how secure its devices are, and what its role will be in the tech sector for years to come.

Scott Kennedy is senior adviser of the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at the Center for Strategic & International Studies (CSIS). A leading authority on China’s economic policy and its global economic relations, specific areas of focus include industrial policy, technology innovation, business lobbying, multinational business challenges in China, global governance, and philanthropy. Dr. Kennedy has been traveling to China for almost 30 years and has interviewed thousands of officials, business executives, lawyers, nonprofit organizations, and scholars. He is the author of The Fat Tech Dragon: Benchmarking China’s Innovation Drive (CSIS, 2017); (with Chris Johnson) Perfecting China Inc.: China’s 13th Five-Year Plan (CSIS, 2016), and The Business of Lobbying in China (Harvard University Press, 2005). He has edited three books, including Global Governance and China: The Dragon's Learning Curve (Routledge, 2018), and Beyond the Middle Kingdom: Comparative Perspectives on China’s Capitalist Transformation (Stanford University Press, 2011). His articles have appeared in a wide array of policy, popular, and academic venues, including the The New York Times, The Wall Street Journal, Foreign Affairs, Foreign Policy, China Quarterly, China Journal, and the Journal of Contemporary China. Dr. Kennedy is a fellow in the National Committee on U.S.-China Relations' Public Intellectuals Program.

TRANSCRIPT

What is Huawei and why has the company come under suspicion in the United States?

Scott Kennedy: Huawei is one of the world's largest telecom companies. It is China's most successful high-tech company. It's about 30 years old. It started making relatively backward switching equipment for telecom networks. And over the years, it's developed a whole suite of technologies from routers and servers that work in networks, to handsets and cellphones, even very fancy ones, to apps that run things. They provide all types of services that businesses and governments use. The reasons many Americans and folks in Western governments are worried about Huawei are, first of all, the background of the company. It's a private company but it was started by Ren Zhengfei, who worked as an engineer in the People's Liberation Army. And there may be other personnel links between the company and the Chinese government, different parts of the Chinese government. But it's more important than just these personnel ties, it is actually what Huawei has done or may do which really has people concerned.

The first is Huawei has been accused of and actually admitted to, in the past, stealing intellectual property from Western companies. And so it committed this at least original sin and some people think it's still engaged in it. If you look at the indictment brought against Huawei in January earlier this year, you'll see that they had, apparently, a program that rewarded employees for successfully obtaining technology from other companies.

The second reason people are concerned about Huawei is that it does business in parts of the world that are subject to American sanctions. And apparently, Huawei has violated those sanctions. And so that's another reason people are concerned about it.

The third reason, and one that's probably gained more attention now and is a more enduring issue is the idea that there is stuff inside Huawei equipment that allows them to see into your data, to violate your privacy, of individuals, of governments, of companies. And that it's intentionally there or that they could flip some switch and make your network collapse or have something else horrendous happen to you. That it's something the company intentionally has in there, or in combination with the Chinese government intentionally is doing, is the third reason.

The fourth reason is not that Huawei is doing something intentionally harmful but that it is a major telecom company of a strategic competitor of the United States. And simply by the existence of its equipment in Western networks, that creates new vulnerabilities for Western governments, businesses, non-profits, individuals.

Those are the things that worry people about Huawei. I think a lot of these worries are reasonable but what we still don't know is how severe the threat is from Huawei across each of these domains. And what we also don't know is given those risks, what would be the best policy alternatives? That's something that Washington and other capitals around the world are debating right now. And we probably won't solve that debate for some time.

Huawei claims that Chinese law does not compel it to hand over user data. Is this accurate?

Kennedy: I think the idea that Huawei has never granted access to its equipment or the data that runs over its networks is hard to believe. Because I think all telecom equipment providers have probably provided access to their home government at some point along the way. It could be that the Chinese government, when they need access, go to telecom operators like China Mobile, China Telecom, China Unicom, not the equipment providers. But that is just a lawyerly answer that Huawei would give as opposed to the reality. I think people should assume that the Chinese government actively engages in trying to obtain information from sources outside China. And some of that information sometimes is traveling over Huawei networks and equipment. And so whether Huawei is explicitly involved in that or it's just simply the presence of their equipment which may make it somewhat easier, I think that's at least how we ought to most likely conceive of the issue and not pay so much attention to the type of press releases and statements that are coming from Huawei.

How could the emergence of Huawei as a major telecoms company impact 5G technology worldwide?

Kennedy: Huawei and 5G are deeply and closely tied to each other and will be for a long time. 5G stands for fifth-generation mobile telecommunications technologies. In the late 1990s when the world was using second-generation mobile technologies, the Chinese just simply paid royalties to telecom companies in Europe and the United States to adopt those technologies into the Chinese market. When third-generation wireless technologies came out, the Chinese developed their own standard alongside the Europeans and Americans and rolled those out through China Mobile, one of China's telcos. Modestly successful but still basically just used inside China. Fourth-generation, which is what all of us, if you look at your phone and you see that 4G, is what we're using now, also called LTE. China is, and including Huawei, big contributors to that technology. And China has a lot...Chinese, including Huawei, have IP in that. And every time a phone is sold or equipment is sold, some of the royalties go to Huawei. Fifth-generation technologies, which have just been developed and are being developed now for mobile, will allow super-fast broadband communication, not just for movies, and streaming video, and games that individuals can use, but machine-to-machine communication at unbelievably rapid speeds so that you can have autonomous vehicle networks, or distance surgery, or virtual reality networks and things like that. And Huawei is deeply invested in 5G, the biggest contributor in terms of IP to 5G.

That all said, I think it's really important for people to know that 5G ain't ready yet. As much as there's been so much hype around it, there is still no killer app yet for 5G. We've got the space in the tubes that carry data, the ones and zeroes, but we don't have a business model that is necessarily yet ready to figure out how we're going to pay for this. Other than selling the equipment, the usage of the equipment, the apps, we're still several years from that. Technological reasons, business model reasons, you think about autonomous vehicles. That's still a very small scale, it's not ready for prime time. And we don't have ways in which people are going to make money off that just yet. So I think we still have 7 to 10 years before 5G, as not just a technology but as applications, is really ready. And that gives us a little bit more time, I think, to prepare to figure out how to respond to Huawei and how important it is to the global economy.

Does the current trade war have any impact on the U.S. government’s actions toward Huawei?

Kennedy: The core of this conflict probably is around high-tech. And Huawei is at the center of that. And so certainly American officials in the Trump administration, in Congress, are deeply concerned about the potential challenge that China presents in its high-tech drive. Not just the fact that China may be a high-tech power but particularly the way it's going about being a high-tech power in terms of using industrial policy protectionism to promote Chinese companies at the disadvantage of Western competitors and also potentially with negative consequences for supply chains, for business models, for technological development, if the Chinese continue to use this model. Huawei is connected to all of that, it's China's leading high-tech company. It's if you took Amazon, Microsoft, Intel, rolled them all into one, that's how important Huawei is to China, even though it doesn't provide all of those services. But that's how important it is. And so China is quite defensive about protecting Huawei, promoting it. And, of course, the U.S. and others are quite concerned about Huawei for exactly the same type of parallel reasons, some of which I touched on before about Huawei and the type of activities it could be engaged in.

So, however the trade negotiations turn out in the coming weeks, whether we get a deal or whether we don't get a deal, the technology competition between the United States and China is going to continue into the future. Huawei will be at the center of that competition. We're going to try to figure out either how to manage that competition or we're going to devolve into a much more heated high-tech conflict whose boundaries are still unknown.

Will the trade war become a larger technology war between China and the United States?

Kennedy: The current trade tensions the U.S. and China have are partly about market access and just, can the U.S. sell as much as it should be able to sell to China? Whether that's agricultural goods, industrial goods, services. That's something President Trump cares a lot about and is a big part of the negotiations. In addition to that though, the other part of the negotiations are really about China's economic system and industrial policy, which is now centered around China becoming a high-tech power. And China uses a whole variety of industrial policies from financing, standard setting, competition policy, tariffs. You name the tool, the Chinese have it in their arsenal to promote domestic companies to obtain technology, engage in R&D, to scale up, to acquire market share in China, to go abroad. China becoming a high-tech power in and of itself isn't really a threat to the United States and the West or other high-tech powers, it's how China is going about it, it's this usage of industrial policy in a very discriminatory way, by a country the scale of China, that creates problems for others. So, that's the worry. And Huawei is connected to that because Huawei receives certainly plenty of benefits from China in terms of industrial policy and support. And so there's both a commercial concern as a result of industrial policy and how it could affect the global economy and the U.S. economy and jobs.

There's also a national security concern since our economic foundations are central to our national security foundations and our power, but also these technologies are often dual-use. And so it's particularly in telecom, and so these are not one and the same but deeply linked. And if we get a deal between the United States and China this year over trade and we ink something and president Trump and Xi shake hands, that will solve some of the economic issues perhaps on the sales side, market access side. But these industrial policy issues, the high-tech competition, that is not going away. Because China's system is not going to fundamentally change and the U.S. and China, their level of strategic trust is about as low as it can be. And so that type of competition is going to be there for a sustained period.

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