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U.S. Pursued Huawei CFO’s Arrest Despite Risk to Trade Talks With Xi

Jennifer Epstein, Peter Martin and Dandan Li

(Bloomberg) -- The Trump administration arranged the arrest of Huawei Technologies Co. CFO Meng Wanzhou aware of the potential impact on trade talks with China but intent on showing resolve over Chinese companies accused of violating U.S. law.

In China, the detention of the high-profile executive has sparked an intense debate within the government on whether to retaliate against the U.S. or carry on with trade talks, according to seven officials from five different agencies.

The arrest of Meng, the daughter of Huawei’s founder and a possible heir to the company, happened around the same time that President Donald Trump was dining with President Xi Jinping in Buenos Aires to discuss the trade war between the countries. The firm is one of China’s most iconic brands and the key to Xi’s plans to dominate new technologies such as 5G networks.

“The detention of Huawei’s CFO is not an accidental incident and will cast a shadow over the trade talks, but both sides will work hard to avert that bad influence,” said Wei Jianguo, former vice minister of commerce and now a vice chairman of the China Center for International Economic Exchanges.

White House National Security Adviser John Bolton, who sat at the table with Trump and Xi during the Group of 20 meeting in Buenos Aires, knew in advance of the U.S. request that Canadian authorities arrest Meng, he told National Public Radio on Thursday. After Bolton’s interview, a White House official said that Trump was not aware of the arrest in advance, distancing the president from the provocative move. It wasn’t clear when Xi first learned of it.

Huawei is China’s largest maker of smartphones and telecommunications equipment and has been swept up in concerns that products made by Chinese technology companies are avenues for surveillance by the country’s intelligence agencies.

In Beijing, officials concerned about the economy warned that a collapse in trade talks would hurt China more than the Huawei arrest. Trump has threatened to raise tariffs to 25 percent on $200 billion of Chinese goods if a deal isn’t reached in 90 days. In the worst case of a 25 percent duty on all Chinese goods, 2019 economic growth could slump about 1.5 percentage points to 5 percent, down from 6.6 forecast for this year, according to Bloomberg Economics.

China Split

But Chinese national-security officials pushed for a tougher response, including possible retaliation against U.S. companies.

The Huawei episode has reverberated beyond the U.S. and China. Even before Canadian officials detained Meng on Dec. 1 over potential violations of U.S. sanctions on Iran, officials from the U.K., Germany and France were becoming increasingly wary of the telecom-equipment maker, according to people familiar with the matter. In Japan, the Yomiuri newspaper said Friday the government will effectively ban Huawei devices from being used by ministries.

Europe, where 5G networks will be rolled out starting next year, is a key battleground for Huawei as its largest market outside Asia, and where the company has spent more than a decade notching up contracts with the likes of Deutsche Telekom AG and Vodafone Group Plc.

Xi Challenge

The U.S-orchestrated detention of a leading figure in the Chinese technology industry undercuts a key goal for Xi in the U.S. talks: to show relations between the U.S. and China returning to a more normal footing. The Chinese president has sought to prevent the economic conflict from spilling into other sensitive areas such as Taiwan or the disputed shipping lanes of the South China Sea.

While fear of the impact of worsening the trade war worried economic officials, others more involved with national security argued that Xi caved too much in the trade talks and ended up looking weak to the public. The Huawei arrest was just another tactic by the U.S. to gain even more leverage, they say, and China should fight back with measures that hurt American companies.

One official mentioned being personally angry because Huawei is a point of national pride for the Chinese people, and keeping the issue separate from trade talks would be difficult even if top leaders wanted to. Even ahead of the talks, one official invoked the Qing Dynasty associated with China’s “century of humiliation,” when it lost territories like Hong Kong to foreign powers.

Publicly, at least, China is keeping the issues separate. On Thursday, Commerce Ministry spokesman Gao Feng told reporters that China is implementing agreements reached with the U.S. on agriculture, autos and energy. Friday, Foreign Ministry spokesman Geng Shuang dismissed concerns that China would retaliate against U.S. companies.

Media Outrage

Government-run media including the English-language China Daily railed against Meng’s arrest Friday, accusing the U.S. of a politically motivated effort to contain China’s -- and Huawei’s -- ascendancy. “Obviously Washington is resorting to a despicable rogue’s approach as it cannot stop Huawei’s 5G advance in the market,” the nationalist Global Times said in an editorial.

At the same time, Huawei itself dispatched a communique to its global suppliers and partners, saying it intends to keep business relationships around the globe unchanged. But the telecoms giant also accused Washington of violating the spirit of free competition. “It is unreasonable of the U.S. government to use these sorts of approaches to exert pressure on a business entity.”

On Friday, Meng will have a bail hearing in Canada to determine whether she’s a flight risk and should remain in detention during proceedings on extradition to the U.S. Canadian authorities detained Meng as she was changing planes in Vancouver at the request of the U.S., which alleges that Huawei violated sanctions on Iran. The same day, Trump and Xi met for the first time in more than a year.

The timing of the move against Meng was coincidental, driven by an itinerary that put her on Canadian soil on Saturday, said a person familiar with the matter. Even so, the White House didn’t delay or block the action.

Meng’s arrest is part of an ongoing investigation by U.S. prosecutors into whether Huawei violated banking laws as it sought to evade sanctions against Iran by routing a series of transactions through HSBC Holdings Plc, according to a person briefed on the matter.

The U.S. request for Meng’s extradition stems from a Trump administration campaign to increasingly hold Chinese nationals accountable for committing crimes, said a second person familiar with the matter, who asked not to be identified speaking about the sensitive issue.

(Updates from second paragraph with Chinese debate.)

--With assistance from Jennifer Jacobs, Chris Strohm, Edwin Chan, Haze Fan and Steven Yang.

To contact the reporters on this story: Jennifer Epstein in Washington at jepstein32@bloomberg.net;Peter Martin in Beijing at pmartin138@bloomberg.net;Dandan Li in Beijing at dli395@bloomberg.net

To contact the editors responsible for this story: Alex Wayne at awayne3@bloomberg.net, Paul Sillitoe, Gregory L. White

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