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This paper is the first in the new AEI Economic Studies series, edited by Aparna Mathur. The aim of this series is to promote innovative academic research critical to understanding, and confronting, the challenging policy debates of today. The topics will cover a wide range of subject areas, from tax policy to trade issues and from health policy to labor markets.
The Chinese company Huawei has emerged as the second-largest telecommunications equipment company in the world. It operates in 140 countries around the globe, providing equipment, software, and services to forty-five of the world’s fifty largest telecom operators. It is moving aggressively downstream into the burgeoning smartphones market. As a recent, detailed report on the company concluded, Huawei’s “extraordinary range of product offerings supports almost every meaningful segment of telecommunications network architecture.”1
Despite its global success, Huawei has consistently been rebuffed in attempts to make large investments and land large contracts in the United States. US government officials have intervened on a number of occasions to block potential acquisitions and equipment contracts involving Huawei, citing security concerns (though without specific details). The company has vigorously contested allegations that it has ties to the Chinese military or represents a security risk in the United States. It has vowed to continue its quest to become a significant player in the US telecom market.
All of this is being played out against a background of increasing tension between Washington and Beijing over cyber attacks on US corporations and government agencies that have been traced back to sites and hackers in the People’s Republic of China (though not to the government directly). As this study was going to press, the top counterintelligence agency in the United States pointed the finger directly at China, stating, “Chinese actors are the world’s most active and persistent perpetrators of economic espionage.”2
In addition, the White House disclosed that it had commissioned a task force to evaluate the “opportunities, risks and implications” posed by foreign telecommunications companies in the US market. US officials let it be known that while no particular company or country was targeted, Huawei’s expansion in the US market was a “key impetus” for the initiative.3
At the same time, the Obama administration, faced with the continuing economic drag from the global financial crisis and economic downturn, has been eager to reaffirm America’s historic open arms policy toward foreign direct investment (FDI) as a means of enhancing renewed economic growth and prosperity. This includes the potential of large FDI inflows from China over the next decade. To underscore this commitment, Vice President Joe Biden recently urged Beijing to increase investment in the US market, saying, “We are still the single (best) bet in the world, in terms of where to invest.” Chinese investment, he continued, “means jobs. American jobs.”4 In turn, Beijing has been quick to protest America’s alleged unfair treatment of Huawei and other Chinese telecommunications companies and the “lack of transparency” in US FDI policy. It has also threatened to match purported US investment obstacles with new hurdles of its own.
This study traces Huawei’s corporate history, particularly its unsuccessful efforts to gain a foothold in the US market. It analyzes both the economic and security challenges posed by future Chinese investment in sensitive sectors, such as information technology and the broader telecommunications supply chain. The study concludes with recommendations for action by the US government, by the Chinese government, and by Huawei, to accommodate future Chinese investment and contracting in the US telecommunications sector while preserving vital US national security interests and priorities.
These recommendations include:
1. US-China Economic and Security Review Commission (USCC), “The National Security Implications of Investment and Products from the People’s Republic of China in the Telecommunications Sector,” January 2011, 34–35, www.usc.gov?REP/2011/FINALREPORT:TheNationalSecurityImplicationsofInvestmentsandProductsFromThePRCintheTelecommunicationsSector.pdf (accessed October 25, 2011).
2. “Foreign Spies Stealing US Economic Secrets in Cyberspace,” Report to Congress on Foreign Economic Collection and Industrial Espionage, Office of the National Counterintelligence Executive, October 2011, Washington, DC.
3. Siobhan Gorman, “U.S. Works to Counter Electronic Spy Risks,” Wall Street Journal, November 12, 2011.
4. Kandaswami Subramanian, “Joe Biden’s Visit to China—Analysis,” Eurasia Review, www.eurasiareview.com/24082011-joe-biden%E2%80%99s-visit-to-china-analysis (accessed November 8, 2011).
5. Organisation for Economic Co-operation and Development (OECD), The Export Credits Arrangement: 1978–2008 (Paris: OECD, 2008). See also Gary Clyde Hufbauer, Meera Fickling, and Woan Foong Wong, “Revitalizing the Export-Import Bank” (Policy Brief 11-6, Peterson Institute for International Economics, Washington, DC, May 2011).
6. “The Long March of the Invisible Mr. Ren,” Economist, June 4, 2011.
Claude Barfield is a resident scholar at AEI. His areas of study include international trade, science and technology policy, and intellectual property. He has taught at Yale University, the University of Munich, and Wabash College. He served in the Ford administration, on the staff of the Senate Government Affairs Committee, and was costaff director of President Carter’s Commission for a National Agenda for the Eighties. He received a BA from Johns Hopkins University and a PhD from Northwestern University.
Chinese telecom-equipment maker Huawei has become a global corporate giant, yet security concerns from US officials have kept it from gaining a foothold in America, intensifying US-China tensions. In a time of great economic need, US desire for foreign direct investment from China is clashing with fears over cyber attacks from organizations suspected to be under Beijing’s influence.
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