The Huawei conundrum

The recent anti-Huawei rhetoric in the US Congress has exposed an important public policy dilemma faced by modern nations. The first task of any government is to assure security for its citizens. The second is to promote the general welfare. Promoting economic welfare is best accomplished with an economy richly integrated into global commerce and taking advantage of modern technology, services and business practices that the most successful companies around the world have to offer. The dilemma is that security can appear to be vulnerable when foreign firms are your providers.

The specific problem is that companies operating on a global scale may not be fully separated from their home governments. Is the company an independent economic actor separate from the security instruments of the home country? Is it a reliable corporate partner? What powers or unintended access does it have as an insider in the customer's systems? If a conflict flares up, will it take a side? Whose?

Huawei offers a poignant example. A private firm started and headed by a former People's Liberation Army officer and owned by its Chinese employees, Huawei, has risen in less than 25 years to be the world's second-largest telecommunications supply firm. It operates in 140 countries and supplies equipment, software and services to 45 of the world's 50 largest telecommunications suppliers. It recently became a major competitor in the smartphones markets. Huawei offers first-class products at extremely competitive prices. It is accepted widely and rejected selectively across many markets.

Huawei has been blocked from a number of ventures in the US. In 2010, for example, Sprint-Nextel was strong-armed by the US government to not award a large network structure upgrade contract to Huawei. As a result, the contract was divided among Ericsson (Swedish), Alcatel-Lucent (French) and Samsung (South Korean). All foreign, all strong rivals to US firms, all acceptable alternatives.

Recently a congressional committee called on the US government and the private sector to avoid doing business with Huawei and another Chinese company, ZTE, saying they have strong ties to the Chinese government, especially the military. The Australian government recently indicated that Huawei could be excluded from bidding on contracts for its planned national broadband network.

The day after the congressional condemnation of Huawei, Softbank, a large Japanese telecom group, acquired a 70 percent stake in Sprint-Nextel, the third-largest US telecommunications network. T-Mobile, the fourth-largest, is owned by Deutsche Telekom of Germany, which recently announced plans to buy the next largest, MetroPCS.

Earlier this year President Barack Obama required Ralls, a branch of the Chinese firm Sany, to give up on a wind power project near a US naval facility. Two more deals are being scrutinized: CNOOC's acquisition of Nexen of Canada and Wanxiang's purchase of A123, a manufacturer of batteries of electric cars. In contrast, the Chinese sovereign wealth fund was permitted to take a large stake in the power utility AES.

Inconsistent or unreasonable restrictions could pose a serious threat to rapidly growing and much needed Chinese investment in North America, now nearing $12 billion, 65 percent of which is by State-owned enterprises. Chinese global outward investment is forecast to reach $1 trillion by 2020. How this investment is restricted is exceedingly important. Will rules be fair and consistent? Will they protect national security or domestic rivals?

This is not a problem of foreign versus domestic. It is a problem of trust. Americans welcome, indeed compete aggressively for, Chinese investment. But permitting any firm into the technical infrastructure that is a foundation for national security requires a substantial amount of trust. The solution requires a three-way effort among Washington, Beijing and the private firms that want to service or supply the secure infrastructure in either country.

The first burden falls on the firms. In times of growing geopolitical tensions, firms must earn the trust that permits a government to let it in. Huawei, for instance, is working with the cyber-security agency in Britain and private groups in Canada and the US to evaluate threats, scrub-down equipment, and to verify security measures. Ultimately it must convince the political system, the most sensitive variable in the equation, that it is a responsible corporate player.

The second burden falls on the capitals to work cooperatively, openly and actively to show joint ownership of the problem. They need to continue the many efforts to develop a welfare-promoting economic partnership that balances commerce, growth and security. Trust grows slowly; patience here is a necessary virtue.

The author is professor of trade and development, Monterey Institute for International Studies and adjunct professor at Georgetown University.