It all began about a year ago, at the large tech expo CES 2018 in Las Vegas.  The US President of Huawei’s consumer business Richard Yu went off-script in his presentation to lament that the Chinese smartphone giant had been unable to consummate a deal to sell its smartphones at any large US-based cell carrier. Political pressure being applied by lawmakers in US Congress on AT&T and other carriers is the root cause of Huawei’s woes. US telecom firms would indeed be putting government contracts in jeopardy by doing business with the Chinese firms, so Huawei mobile devices are currently unobtainable from a major US carrier. Anyone who wants to use any of the hottest models have to buy them from specialist online retailers or Huawei’s consumer website and activate the phones or tablet PCs themselves.

The situation became worse when Huawei’s Chief Financial Officer and the daughter of the company’s founder, Meng Wanzhou, was arrested on December 1 in Vancouver at the request of the US government on grounds that the company violated trade sanctions against Iran. This has become a major international incident and Beijing is now accusing Washington of this action against the company as being politically or economically motivated.[i]

The US has also been lobbying its allies in Europe and other countries to cease doing business with Huawei, particularly as it pertains to plans for future international rollouts of 5G equipment. The White House has been partially successful so far. The big French carrier Orange has ruled out using Huawei products in its core 5G network in France, and Germany’s giant Deutsche Telekom has announced that it is reviewing purchases of Chinese equipment.

It appears that the $ 26.5 billion Sprint and T-Mobile merger is likely to present a major issue for SoftBank, which is a majority shareholder in Sprint and has close ties to the Chinese firm. If Trump administration officials deem the deal as a threat to national security, completing the merger may be problematic.

So, what’s next for US and China and the future Chinese consumer electronics overseas?

The tech relationship between Beijing and Washington is a highly complex one. This is because Huawei does not just make smartphones. It is also a gigantic telecommunications equipment manufacturer and is actively involved in determining the global 5G standard, which will be shaping communications in the next decade.

However, it will not go smoothly, particularly if the Senate passes the bill sponsored by US Republican representative Michel Conway of Texas, which would prohibit any US government agency from doing business with Huawei, ZTE and similar Chinese firms. The proposed bill essentially claims that Huawei and ZTE have shared sensitive information with Beijing and that Chinese security agencies can access private US business communications using Huawei and ZTE’s equipment. The two Chinese companies, of course, have repeatedly denied these allegations since Congress began accusing them back in autumn 2012. No substantial proof of espionage by Huawei/ZTE has ever been established and the Senate intelligence committee report did not offer much in terms of substance either.

Beijing and Washington in a dance that never ends

There is no question that the relationship between China and the US, two of the biggest players on the global scene, is dynamic and diverse and not always constructive. It is equally clear that China possesses one of the most sophisticated security apparatus in the entire world, rivalling that of Russia, the US, and other big western nations. Just as the US routinely spies on many countries, China’s security agencies also work for the national interests of their country. So, what is the solution in this economic and political reality? To stop buying equipment form China and to cease doing business with them would be impossible, practically and from a financial standpoint.

In 2017, US exports to China were $116 billion, whereas the value of China’s exports to the US was $463 billion – making that year’s trade deficit $347 million. The US debt to China, financed by US Treasury notes, is $1.2 trillion. This financing of Treasury notes has kept US interest rates low. If China stopped buying US Treasury notes, the interest rates would rise and could throw the entire world into a global recession. This would not be in the best interest of either US or China because shoppers would buy fewer Chinese exports. Beijing also cannot call in that $1.2 trillion loan – it would spoil any possible relationship with Washington.[ii]

That is the economic reality. The US, and the western world as a whole, is China’s best customer next to its own domestic market. Beijing obviously has zero desire to jeopardise this, regardless of its own national security interests. If it were discovered that China was, in fact, using consumer electronics exports to spy on American citizens and businesses en masse, the consequences would be utterly disastrous for the Asian country. Not just in terms of jeopardising its export business in the US but also in every country it does business with now. It would also be catastrophic for China’s image in the international arena and would throw global trade into utter chaos.

Made in China is not just a label

Huawei is one of the world’s biggest makers of smartphones and networking equipment. The company is at the heart of China’s ambitions to reduce its reliance on foreign technology and become an innovation powerhouse in its own right. The country is pumping hundreds of billions into its “Made in China 2025” plan, which aims to make China a global leader in industries such as robotics, electric cars and computer chips. The introduction of 5G wireless technology, which hinges of Huawei, is a top priority.

The United States, meanwhile, has made clear it intends to push back against China’s growing tech power in order to maintain American dominance.

“In the 20th century, steel, coal, automobiles, aircraft and ships – and the ability to produce things in mass quantity – were the sources of national power,” said James Andrew Lewis, director of the Technology Policy Program at the Centre for Strategic and International Studies in Washington, in a report this week. “The foundations of security and power are different today. The ability to create and use new technologies is the source of economic strength and military security”.[iii]

The truth is, Chinese firms are not just responsible for final assembly, productizing, and shipping product abroad, they also form a large portion of the overall supply chain of manufacturing electronic components used in just about every electronic device manufactured all over the world.

There are all kinds of stuff that go into not just smartphones and mobile devices, but also the Internet of Things (IoT), major appliances, medical devices, automobiles, aerospace, you name it.

If a product has semiconductors in it, there is a good chance they came from China. Yes, there are other countries that make products that have semiconductors and electronics, such as Japan, Korea, Taiwan, Singapore, Vietnam, Malaysia, and, of course, the European and South American nations. But they too use Chinese firms as not just suppliers for certain things but also for partial and final assembly, because it is that much cheaper to do there.

So, what do we do? Well, we can’t prohibit American firms from doing business with Chinese companies or foreign firms that use Chinese-made components just because we are nervous they might use their products to spy on us.

We can set internal procurement controls on certain types of products and have rigorous monitoring and testing of stuff before it ends up being used in government agencies, but that’s about it. There is no practical or legislative way of keeping China out of products being brought into the US or Europe. Such efforts would be counterproductive.

That being said, the threat of our devices being used to spy on us is very much real – but China should not be the focus of concern. Rogue nation states such as North Korea and malicious/criminal groups seeking financial gain are really what the international community needs to be concerned about.

A concerted international effort is needed

There needs to be an international effort to monitor and certify consumer electronics so that we can better understand the nature of these threats and then take appropriate action when they are discovered.

The software developers, major technology firms and even well-intentioned hacker communities already have informal efforts to monitor embedded operating systems and applications for potential malware. To date, they have done a very good job overall of discovering major security exploits and malware, but we can improve this by formalising how this is done by having our governments form and fund organisations with our allies – as part of overall international treaty negotiations – with the express effort of increasing due diligence in analysis and monitoring of software that runs on consumer electronics.

This needs to continue, but we need to go deeper. The real concern would be exploits and malware that would not be discovered within applications or operating systems, but in the components, such as firmware or hard-coded routines within the semiconductors themselves (like a baseband communications chip) that would not be detected as a high-level process.

So far, no such state-sponsored malware or an exploit has ever been detected in a semiconductor component originating from China, or, at least, such a discovery has never been validated. All we have received so far is an accusation from a reporter at Bloomberg that certain SuperMicro server systems had a chip that was intercepting and forwarding network traffic from data centres of 30 American corporations, including Apple. That has so far been proven to be categorically false by SuperMicro, as well as Apple and Amazon.[iv]

The only comparable exploits that have been discovered are the Spectre and Meltdown bugs in Intel, AMD and ARM processors, which are categorized as unintentional but exploitable architectural flaws and common issues related to modern microprocessor design – and they have nothing to do with China.

Should we worry that China is plotting some master plan to hoover up all our data and penetrate our governments and corporations using undetectable malware embedded in the fundamental components found in consumer electronics sold in that country?

The short answer is no. There is a chance it could happen, and we should be vigilant and take our best efforts to monitor that it is not happening, but we cannot preoccupy ourselves with this and look for someone to blame at all costs.

Let western consumers decide which products they want to buy. Legislation that prevents competition is not only stupid and unproductive but it also puts the citizens of those countries at a disadvantage by not allowing them to purchase inexpensive products that other countries can freely and easily access.

Should consumers be allowed to buy Chinese brands of phones in the US? Is Congress and the Trump administration interfering with the fundamental principles of capitalism? These are questions to which we still need clear answers but our search for those answers should not trigger a new tech Cold War.

[i] Horowitz, Julia, Huawei arrest: This is what the start of a tech Cold War looks like, CNN, December 9, 2018, available at https://edition.cnn.com/2018/12/08/tech/huawei-cfo-tech-cold-war/index.html

[ii] Perlow, Jason, Paranoia will destroy us: Why Huawei and other Chinese tech is not spying on Americans, ZDNet, December 18, 2018, available at https://www.zdnet.com/article/paranoia-will-destroy-you-why-chinese-tech-isnt-spying-on-us/

[iii] Lewis, James, How 5G Will Shape Innovation and Security, Center for Strategic and International Studies, December 6, 2018, available at https://www.csis.org/analysis/how-5g-will-shape-innovation-and-security

[iv] Cimpanu, Catalin, Super Micro trashes Bloomberg chip hack story in recent customer letter, ZDNet, October 23, 2018, available at https://www.zdnet.com/article/super-micro-trashes-bloomberg-chip-hack-story-in-recent-customer-letter//