The White House and Congress repel Chinese investment

Chuck Kennedy/White House

President Barack Obama and President Hu Jintao of China watch the United States Army Old Guard Fife and Drum Corps pass on the South Lawn of the White House, Jan. 19, 2011.

Article Highlights

  • The new Red Scare: Critics fear that giving Chinese companies access to vital information infrastructure could jeopardize US security

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  • Obama administration clearly conflicted over security challenges presented by Chinese FDI

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  • Neither the White House nor Congress should be allowed to hide completely behind #natsec concerns

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To combat the economic malaise, the Obama administration is bending over backward to encourage companies to create jobs in America. So why is the White House - and the Congress - challenging Huawei, a high-tech firm eager to invest and compete in the U.S. market?

Call it the new Red Scare. Critics are afraid that giving a Chinese company access to vital information infrastructure could jeopardize U.S. security.

As Congress reconvenes this week, the House Intelligence Committee is expected to pursue an investigation, first announced in November 2011, into the potential security threats posed by Chinese telecommunications firms operating in the United States. Specifically, it would target Huawei, the world's second-largest telecom equipment manufacturer, and ZTE, its smaller sister Chinese company.

The investigation comes on the heels of a new White House task force that will look into the "opportunities, risks and implications" of relying on foreign companies for U.S. telecommunications and information infrastructure. Though the White House denied that the task force was targeting a single country or corporation, it did convey that Hauwei's drive to expand operations in the U.S. precipitated the initiative.

"It is time to clear the air with more precise guidelines-or even red lines-where security is truly jeopardized."--Claude Barfield

The Obama administration is clearly conflicted over the security challenges presented by Chinese foreign direct investment (FDI). Even while launching the task force, administration spokesmen are touting the benefits of FDI for U.S. growth and jobs. On a recent trip to China, Vice President Joe Biden enthused that Chinese investment "means jobs. American jobs. We are still the single [best] bet in the world in terms of where to invest."

The Chinese investment vs. security dilemmas will only grow more difficult in the future. It is time to clear the air with more precise guidelines - or even red lines - where security is truly jeopardized.

Much of the fear over Huawei, a $28 billion private company, stems from its beginning. It was founded in 1987 by an ex-officer of the Chinese military, and during its early years received substantial boosts from the Chinese government, including research organizations with ties to the military.

Over the past decade, it has burst upon the global telecommunications market, and now operates in 140 countries and services 45 of the world's largest telecommunications operators. The company is also a leader in information technology and is rapidly moving downstream to compete in the smartphones and services sectors.

Critics, including a number of members of Congress, argue that Huawei retains close ties with the Chinese military and that the company represents a major threat to U.S. security through the potential of subverting national telecoms infrastructure and providing a vehicle for both economic and military sabotage. Huawei's top executives in the U.S. have vehemently and doggedly denied such allegations. They assert that the company has no ties to the Chinese military, and that it provides normal and vital commercial telecommunications services and equipment in the global marketplace.

Despite its protestations, Huawei has been repeatedly rebuffed by U.S. government agencies in attempts to purchase U.S. telecom assets and to gain major supply contracts with top U.S. system operators such as Sprint and AT&T.

In the U.S., security-related investments are scrutinized by a federal inter-agency committee (the so-called CFIUS process), which is chaired by the Treasury Department and includes key defense and national intelligence officials. In two widely publicized actions, CFIUS officials intervened to stop Huawei from assuming control of two assets - the 3Com company and intellectual property owned by a small, bankrupt company, 3Leaf. Customarily, and in these particular cases, CFIUS officials give no specific reasons for their actions, merely invoking general national security considerations.

Under current law, the U.S. security review process is limited to screening investments in U.S. assets. It does not extend to contracts between U.S. companies and foreign companies. Yet in the past two years, U.S. government officials on several occasions have warned U.S. companies not to award contracts to Huawei or face the prospect of cutoff of future government contracts themselves.

In one case, this message was conveyed in a phone call by the Secretary of Commerce, and on a second occasion by a direct communication from the head of the National Security Agency. Such behind-the-scenes, ex parte interventions clearly undermine U.S. demands that Beijing adhere to the rule of law with attendant due process.

The decision by the Obama administration to create a task force to analyze potential security threats from foreign ownership and foreign contracts in the U.S. telecommunications sector, combined with a full-scale investigation of Huawei by the House Intelligence Committee, represent a consequential moment in U.S.-China ties.

When it comes to national security, there will always be instances when closed-door review sessions are appropriate - including in the case of Huawei. But neither the White House nor the Congress should be allowed to hide completely behind vague, "national security" concerns.

After serious, thorough examinations - through coordination with national intelligence agencies by the White House and through open hearings and security briefings by the congressional committee - both branches of the government should make public their conclusions.

It's what we would rightfully demand of Beijing. And it's what we should expect of Washington. If these are bad guys, say so; if nothing is uncovered, butt out.

Claude Barfield is a resident scholar at AEI

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About the Author


  • Claude Barfield, a former consultant to the office of the U.S. Trade Representative, researches international trade policy (including trade policy in China and East Asia), the World Trade Organization (WTO), intellectual property, and science and technology policy. His many books and publications include Swap: How Trade Works with Philip Levy, a concise introduction to the principles of world economics, and Telecoms and the Huawei conundrum: Chinese foreign direct investment in the United States, an AEI Economic Studies analysis that explores the case of Chinese telecom equipment maker Huawei and its commitment to long-term investment in the US.
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