China tech discrimination by US is hurting all sides

If you’re having a hard time deciphering why the US government is discriminating against Chinese technology companies, you’re not alone.

The only sure thing about this increasingly illogical situation is that no one is benefiting from it.

The latest situation arose last week, when regulators blocked the $580 million sale of Massachusetts-based Xcerra to Hubei Xinyan, a Chinese state-backed investment fund. Xcerra makes equipment used for testing semiconductors.

The Committee on Foreign Investment in the United States (CFIUS) killed the deal because Xcerra gear is used by chip manufacturers that supply the US government and military, according to a Reuters report.

CFIUS, which scrutinises deals that may have national security concerns, has been hawkish with Chinese companies since Donald Trump became president. The agency also blocked the acquisition of Oregon-based Lattice Semiconductor last year by Chinese-backed private equity firm Canyon Bridge Capital Partners.

The Xcerra move follows a recent flurry of anti-China posturing.

In November, word broke of a US Homeland Security memo warning against products made by DJI. The department had “moderate confidence” the Chinese company’s commercial drones were being used to spy on critical infrastructure.

Wireless carrier AT&T followed suit in January by pulling out of a deal to sell phones made by telecom supplier Huawei.

The move was seen as a reaction to the Defending US Government Communications Act, a bill introduced in Congress that seeks to ban agencies from buying products made by Huawei and fellow Chinese manufacturer ZTE.

Several US security bodies, including the Federal Bureau of Investigations and the Central Intelligence Agency, went a step further this month by warning consumers against using phones made by those two companies.

FBI Director Chris Wray said their close co-operation with the Chinese government means their products have “the capacity to conduct undetected espionage”.

US concerns are apparently so deep officials have even considered a proposal to build a nationalised 5G wireless network to keep Chinese spies from listening in on Americans’ phone calls.

Huawei, ZTE and DJI have all strenuously objected to the accusations, while the Chinese government believes any product bans would violate World Trade Organization rules. The discrimination shows a “Cold War mentality,” China’s Ministry of Commerce has said.

Whatever it is, the posturing doesn’t make much sense on a security or protectionist level, especially given the lack of substance behind the allegations.

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As Huawei has noted, the company’s products are widely used in many western countries. Huawei also sells wireless equipment to more than 45 of the world’s top 50 carriers and is poised to be a major supplier in the upcoming move to 5G, including with Etisilat in the UAE.

Many of those carrier customers are in Europe, where government security and privacy concerns are arguably even stronger than in the United States.

Huawei and ZTE were also the subject of a 2012 US investigation that looked into whether their equipment constituted a threat or could be used for espionage. Despite political pressure to the contrary, investigators failed to come up with any evidence.

Canada, under Conservative Prime Minister Stephen Harper, had similar security concerns and moved to ban Huawei equipment in 2012. But, following a change in government and attitude in 2015, Huawei is now cleared to build a 5G network for Bell Canada, the country’s largest telecom firm.

The US positioning can’t be considered just a conservative stance, since the ban effort currently before Congress reportedly has broad support among both Republicans and Democrats.

If American policymakers have any point to make, it’s that Chinese companies could indeed be more transparent. Huawei, for one, is more than three times bigger by revenue than Swedish competitor Ericsson, yet is still privately held.

To be fair, the suspicions could turn out to be true over the long run – but for now there’s little reason to believe them. Unfortunately, everyone is losing as a result of them.

For their part, Chinese companies are being held back in the big and lucrative US market, which in is in turn shielding western counterparts from their competitive pressure. That may be the point of the discrimination, but it’s ultimately self-defeating since it is likely to result in slower innovation and higher prices.

Huawei, for instance, is known for selling less expensive network gear than competitors. American carriers may end up paying more to build their 5G networks than they should, with the added costs passed to consumers in the form of higher mobile phone bills.

The biggest head-scratcher about the Xcerra deal, meanwhile, lies in how tangential the company is. As a testing-gear supplier, it plays a relatively small role in the products it is involved in.

If the US government is really going to try and stop components from being produced by Chinese companies on security grounds, it will quickly discover that to be an impossible task.

From smartphones and televisions to appliances and cars, there is hardly a piece of electronics on the planet that doesn’t have parts made in China. Good luck banning all that.