Why the arrest of Huawei’s CFO amid trade war tension should not push China to rely more on home-grown technology

  • Scott Kennedy says techno-nationalism is a fool’s errand and instead of doubling down on self-reliance, China should launch a new great leap of reforms, given that the sectors which are most open to competition have performed best
PUBLISHED : Monday, 17 December, 2018, 2:03am
UPDATED : Monday, 17 December, 2018, 9:16am

Just as it appeared that US-China relations had received some breathing space with a 90-day respite in new tariffs, a punch to the gut came in the form of the arrest of Huawei executive Meng Wanzhou. Given Huawei’s importance as China’s most successful hi-tech company, Beijing will need to stay focused on its strategic long-term national interests. Otherwise, the US-China relationship could suffer a knockout blow from which it would be very difficult to recover. 

Potentially incendiary incidents are nothing new. The 1995-1996 Taiwan Strait crisis, the unintentional bombing of China’s embassy in Yugoslavia in 1999 and the collision of military aircraft above Hainan in 2001 also incited nationalist passions. But in these cases, China’s leadership eventually tamped down emotional reactions and compartmentalised these problems in the name of preserving the overall relationship.

The case in Vancouver involves only a single individual and is being handled by a country with a strong rule of law tradition. Given Canada’s desire to maintain strong commercial ties with China, it wouldn’t run the risk of offending Beijing were there not significant evidence justifying these actions. Yet this case seems like it could be so damaging because the broader atmosphere has already soured and the relationship feels genuinely fragile. Also, because it is likely to be far from the last shoe to drop in the West’s focus on Huawei and cybersecurity.

The big question of the moment is: how should Beijing respond at this historical juncture, not just to this case but to the larger choice it faces? The worst thing China could do would be to conclude that it should double down on self-reliance and the strategy of indigenous innovation.

My multi-year study on China’s hi-tech drive shows that the country has been most successful in those sectors that are most open to competition and where Chinese companies have integrated themselves into global supply chains and innovation networks. It is no surprise that e-commerce and online services have blossomed in an environment of wide-open competition and diverse people, institutions and funding models.

The more the state has intervened and engaged in discrimination, the worse the results have been

Although China’s pharmaceutical sector has yet to have huge breakthroughs and has drawn attention for scandals and unethical practices, the industry also shows substantial promise because of the globalised collaboration involving scientists, companies and financial institutions stretching across China, North America and Europe.

By contrast, the more the state has intervened and engaged in discrimination, the worse the results have been. China’s central and local governments have thrown over 400 billion yuan (US$58 billion) into electric vehicles, required technology transfer in joint ventures, and erected barriers to foreign battery makers. The result: so-so technological progress, overcapacity lurking just around the corner and barely any reduction in air pollution.

China has spent even more in a state-directed effort to develop its own commercial aircraft. The outcome is a poorly designed regional aircraft (the ARJ21), a modestly improved narrow-body jet (the C919) that is less efficient than its primary competition (Boeing’s 737 and Airbus’s A320) and way behind schedule, and plans for a wide body jet (the CR929) that independent analysts believe has little chance of success. China’s semiconductor sector is no closer to independence than it was before China assembled and started spending U$150 billion in funds.

In short, techno-nationalism is a fool’s errand, a path to commercial dead-ends and, ironically, weakened security.

Given these results, the best choice for China going forward is clear and one emphasised by many of the country’s own experts: choose the path of “reform and opening” and establish a true market economy. Forty years ago at the famous Third Plenum in December 1978, Deng Xiaoping and other leaders did not ask for the approval of the United States and Western countries in making a decision to put aside class struggle in favour of modernisation. And despite the announcement to establish diplomatic ties, there was no guarantee economic ties would improve quickly.

Where to now? 40 years after the big experiment that changed China

It would be almost two years before China would receive most-favoured-nation status and over two decades before China joined the World Trade Organisation. Similarly, in early 1992, Deng received no promises from abroad when he went on his Southern Tour to jump-start the liberalisation process, a bold decision that is the cornerstone of China’s recent achievements.

China’s leadership should not be distracted or deterred by individual cases, fears about interdependence, or the Trump administration’s discombobulating pressure tactics. This week, when Chinese President Xi Jinping presides over the ceremony marking the 40th anniversary of the launching of the reform era, he should recommit his administration to comprehensive and rapid marketisation.

Concepts such as “competitive neutrality” for state-owned enterprises should be accompanied by substantive steps related to reducing subsidies, lowering tariffs, expanding market access in goods and services and protecting intellectual property rights, including eliminating cyber theft of trade secrets.

China urged to come clean about the government role in its economy

Such measures should be pursued primarily because they provide the best hope for China to enjoy efficient and sustainable growth over the coming generation, but they would also be the best way to convince the Trump administration that China wants to level the playing field and resolve their bilateral differences, which would pave the way for a big deal within 90 days and a new era in the relationship.

The US and China have already lost at least two major opportunities to put a stable floor under the relationship – in 2008, with the collapse of the WTO’s Doha Round, and when the two sides were unable to follow through on the agenda set by Xi and US president Barack Obama at Sunnylands in 2013.

If China doesn’t clearly signal its intention to launch a new great leap of reforms and arrive at a deal with the Trump administration, it should be under no illusion that things will get any easier down the road, either from Donald Trump or a successor. The emerging dominant alternative to Trump’s sharp-elbowed style of confrontation on economics and cyber issues, from both Republicans and Democrats, is not a return to standard engagement but rather a strategy of comprehensive competition across economic, security and political spheres, all rooted in a defence of liberal values.

The depth and breadth of such a confrontation would threaten the historic progress China has made over the past four decades. Hence, the choice for Xi could not be starker. To borrow a slogan from a well-known sports apparel company, China’s guiding principle as it considers whether to embrace reform should be obvious: Just do it!

Scott Kennedy is Senior Adviser, Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at the Centre for Strategic and International Studies. He is author most recently of China’s Risky Drive Into New-Energy Vehicles