The Jerusalem Institute for Strategy and Security

Israel should pay close attention to the widening rift between two of its largest trading partners. Israel needs to clarify the “rules of the road” with the US and establish rigorous foreign investment screening mechanisms.

 

On the same day (Dec. 1) that US President Trump and China’s President Xi Jinping were shaping an uneasy truce – a 90-day hiatus in the trade war between the world’s two largest economies – Canadian officials acted to arrest Ms. Meng Wanzhou, a top Chinese technology executive, at the request of US officials.

The rising tensions between the US and China on a range of issues including technology, military, economy, and diplomacy have already jittered global markets and raised concerns over a larger global strategic realignment. Thus, the amicable dinner between Trump and Xi during the G20 summit initially raised hopes that a full-fledged economic conflict could be avoided.

That is why this step by the US taken against a high-profile executive of China’s national business icon caught China off-guard. It was perceived as a shot across the bow in a long game to put further pressure on China during the talks, and to demonstrate that the US has powerful non-tariff weapons too.

While Alibaba and Tencent may be more familiar names with consumers, it is Huawei, a telecommunications giant, that symbolizes China’s high-tech prowess and innovation. With over 180,000 employees, Huawei is China’s biggest private company and the world’s second-largest maker of smartphones. Huawei Deputy Chairwoman and chief financial officer Ms. Meng Wanzhou, arrested as she changed planes in Vancouver, is the daughter of Huawei founder and CEO Mr. Ren Zhengfei and his potential successor.

The US has been investigating Huawei for possible violations of sanctions on Iran. Huawei is pushing ahead aggressively with 5G telecom technology rollout. But the US, Australia and New Zealand have all decided to block Huawei’s 5G technology due to security concerns, though Canada hasn’t done so, and Britain is only blocking Huawei from some tenders.

While the readouts released by China and US after the G20 summit differed on some details, they agreed on a 90-day truce during which both sides will refrain from further tariffs hikes on each other’s goods and will sit down in an earnest attempt to address a long list of US grievances against Chinese practices. If no deal is reached at the end of 90 days, the US will proceed to increase tariffs on US$200 billion of Chinese goods to 25% from 10% currently. If 25% tariffs will be slapped on all Chinese goods, Chinese economic growth in 2019 may slow down to 5% from the 6.6% forecast for 2018, according to Bloomberg Economics.

Thus, the US move is seen as aimed at not just enforcing sanctions on Iran, but at fundamentally changing Chinese behavior. The real issue is growing competition between the world’s incumbent superpower and the rising competitor, and a broader strategic realignment into two camps that will probably continue for decades. China has repeatedly said it has neither the desire nor the ability to replace the US.

After President Xi Jinping was appointed secretary-general of the Communist Party of China (CPC) in October 2012, China began pursuing a more assertive foreign policy. In 2013, Xi proposed what will become his signature diplomatic program, the Belt & Road Initiative – a plan to integrate Asia and Europe through a network of trade and infrastructure, with China at the nexus of the network. The ambitious plan has stirred controversy almost from the start.

US President Trump, in his first National Security Strategy issued in December 2017, defined China as a strategic rival of the US. American policy ever since has sought to put pressure on China through tariffs and other steps, including banning (temporarily) Huawei’s smaller domestic telecom competitor ZTE from buying crucial components.

Then in a clandestine operation aimed at increasing American efforts against economic espionage allegedly ordered by Beijing, FBI agents enticed a Chinese spy to Belgium before putting him on the plane to the US. That came after US Vice President Mike Pence gave a speech Oct. 4 in which he warned China the US “will not stand down.”

Iran is an important trading partner of China and most of the trade falls within legal boundaries. The question here was whether Huawei transferred US technology to Iran or violated sanctions in any other manner. US officials had raised concerns over potential ties of Huawei to Chinese security agencies and the People’s Liberation Army. Mr. Ren, the founder of Huawei, is a former army engineer.

On Dec. 9, China protested the arrest of Meng. China may be forced for now to sacrifice Meng in the face of greater considerations – the 90-day truce during which the two sides are expected to negotiate. But if the talks don’t go well, China may retaliate against US executives or interests. It already has detained two Canadians.

Israel must pay close attention to the widening rift between two of its largest trading partners. Israel, like numerous other countries, is concerned that the day may come it must choose sides. Meanwhile, Israel must have a comprehensive picture of overseas investments. It is advisable to create a foreign investment screening mechanism, and to create a comprehensive database of FDI into Israel.

There’s a Chinese adage, from the popular historical novel Romance of the Three Kingdoms, “yangjing xurui,” meaning honing one’s strength for the big push. It sure seems that both sides are taking a page from ancient Chinese stratagems in their growing rivalry. And don’t forget: China has hardliners of her own.


JISS Policy Papers are published through the generosity of the Greg Rosshandler Family.


photo: Amos Meron [CC BY-SA 3.0], from Wikimedia Commons

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