U.S. Nabbing Huawei Is the Dog That Caught the Car

(Bloomberg Opinion) -- The U.S. is looking like the dog that caught the car. It needs to decide what to do next.

Except that Wanzhou Meng is a person. She's the CFO of Huawei Technologies Co. as well as deputy chairwoman and the daughter of its founder. She's in Canadian custody awaiting extradition to the U.S., and China is outraged.

Huawei is one of the world's largest makers of telecom equipment, China's most important technology company, and a national hero. The arrest of a senior executive at such a marquee company, over potential violations of U.S. sanctions on Iran, threatens to intensify the U.S.-China trade conflict just days after leaders had agreed a truce.

Meng was arrested Dec. 1 in Vancouver — the same day that U.S. President Donald Trump and his Chinese counterpart Xi Jinping met in Buenos Aires. The action didn't come out of the blue: The U.S. Department of Justice opened an investigation into Huawei for sanction-busting in April.

With the U.S. finally making a move against Huawei, the Justice department and the Trump administration have an important question to answer: What do we want out of this?

It's not clear that they know. Before Huawei, smaller Chinese telecom-equipment maker ZTE Corp. was caught breaching U.S. sanctions. ZTE apologized and was let off with a fine and a seven-year suspended sentence on the condition that it change its ways and fire some people.

ZTE broke that deal, and the U.S. hit back by restricting the supply of components to the company. That threatened to cripple the Chinese firm because U.S. parts are crucial to the global technology supply chain.

In yet another example of the transactional nature of the current U.S. administration, ZTE was able to wriggle out of that procurement ban by paying an even bigger fine. The message to the world was clear: The U.S. rule of law is for sale.

This ham-fisted approach to punishing, forgiving, and then re-punishing ZTE must not be repeated if the U.S. wants to be taken seriously.

It's not clear what the U.S. really got out of the ZTE case, beyond a few extra greenbacks. Congress was so incensed at this Trumpian deal that it threatened to reinstate the earlier, harsher penalties on its own. Lawmakers backed down before raising the possibility again.

To date, the U.S. has deployed a sledgehammer approach to its trade war with China. To fight against a perceived trade imbalance and infringement of intellectual property, Trump has thrown up tariffs on an eclectic mix of products. That might work for a trade imbalance, but is a poor way to tackle the ongoing theft of U.S. technology .

If the U.S. simply issues Huawei a very big invoice, then Beijing will be laughing. China is happy to spend money to achieve president Xi Jinping's vision of becoming a technologically independent superpower. A few pennies into U.S. coffers will be money well spent. Such a move would also be a slap in the face to allies such as Australia and New Zealand, which have started to ban Huawei products from their networks, citing that other great U.S. bugbear: security.

Instead, the U.S. should move forward with plans to set up stricter protocols on what it will allow China to buy. The Export Control Reform Act has similarities with the Wassenaar Arrangement, a multinational deal that restricts the flow of weapons and sensitive tools, such as semiconductor manufacturing equipment.

U.S. companies such as Apple Inc., IBM Inc. and Microsoft Corp. are worried about that law and have set their lobby groups to work, Bloomberg Law's Alexei Alexis wrote this week. The regulations lack specificity, they argue. Valid point, but then these companies are desperate to sell as much of their wares to China as possible.

The Commerce Department, which administers the law, would do well to be more refined in its definition of what's allowed and what's not, but it should be sure not to water down the regulations so as to create loopholes. Provisions in the act could then be used to punish offenders with very clear penalties that don't give the same kind of wiggle room that ZTE enjoyed.

In addition, to be truly effective, such regulations need the support of allies. And that will require Trump to spend more time being friendly to the U.S.'s friends and less time being friendly to its enemies. It would also require the U.S. to recognize that not every problem can be solved with a sledgehammer.

With the arrest of a senior Huawei executive, the U.S. has a golden opportunity to change the way China steals technology. Doing anything less makes the chase little more than a charade.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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