SHENYANG, CHINA - OCTOBER 18: People walk by a Huawei store on October 18, 2018 in Shenyang, Liaoning Province of China. (Photo by VCG/VCG via Getty Images)
Why the arrest of Huawei's CFO matters
01:25 - Source: CNN

Editor’s Note: Jeffrey Wright is US analyst, Paul Triolo is geotechnology practice head, and Michael Hirson is China and Northeast Asia practice head at Eurasia Group. The opinions expressed in this commentary are their own.

As President Trump negotiated a trade truce with Chinese President Xi Jinping in Buenos Aires last weekend, an arrest 7,000 miles away created another complication between the world’s largest economies. Meng Wanzhou, the CFO of Chinese telecom giant Huawei and the daughter of its founder, was arrested in Vancouver on December 1 on suspicion of violating US sanctions on Iran.

Meng’s arrest won’t keep the US and China from beginning negotiations, likely next week in Washington. Both sides have much to gain from reopening talks. Trump is under pressure from jittery equity markets and Chinese tariffs on US agricultural products, and Xi is eager to get relief from US tariffs that contribute to a slowing Chinese economy.

But the arrest highlights the fact that fundamental conflicts between the US and China are getting worse, not better, even as the sides try for a détente on trade. Beijing and Washington face technological and geopolitical fissures that may defy efforts to keep them separate from the trade talks.

Meng’s arrest is just the most provocative step in the US government’s long-running effort to push back against Huawei, which US intelligence sees as a security threat. US policymakers have long pressured American carriers not to use Huawei equipment in their networks, and have taken that campaign global, encouraging allies in Europe and Asia to limit Huawei’s presence in existing and shut the company out of their developing 5G networks.

The US’ efforts to limit Huawei’s global business are just part of the broader conflict over tech between the two countries. Both want to control the next-generation technologies — including 5G, self-driving cars, artificial intelligence and others — that will drive economic growth and national security in coming decades. The US has already imposed new export controls and investment rules that will make it harder for China to acquire US technology, an effort that will continue regardless of the outcome of trade talks. Forget the Mexico border wall. The real walls are the virtual and legal ones being built around Silicon Valley and other US tech hubs.

Washington is putting China in a strategically dicey double-bind on tech issues. The experience of ZTE — a Chinese national champion nearly put out of business last summer for violating US sanctions — has made self-sufficiency in tech even more important for China. But the subsidies for key sectors that would make self-sufficiency possible are also a key target of the Trump administration, which believes Chinese subsidies will eventually create the kind of overcapacity that has crippled the steel and solar panel sectors in the US. Xi and senior Chinese officials now realize this, and the Meng arrest and broader salvos against Huawei have been a painful reminder that the ZTE case was not a one-off.

Geopolitical competition is making it all worse. The willingness to take unprecedented actions — like extraditing Meng — reflects a profound attitude shift on the part of the United States, and is one that reaches across both political parties. The US has lost patience with engagement and quiet diplomacy with China, which it now sees as a formidable rival intent on challenging US dominance. The Trump administration is likely to take additional actions in coming weeks and months that look to push back on Chinese policies in areas ranging from cyber espionage to territorial claims in the South China Sea. These actions will rankle nationalists in Beijing, and cement the increasing consensus in Chinese policy circles that the US is seeking to contain China.

Even if trade talks can be compartmentalized from these issues, the US and China remain far apart on key questions. Trump has publicly touted major concessions from China on agricultural purchases and auto tariffs, despite little public commitment from Beijing. And the core issues raised by the US in March — intellectual property theft, subsidies for key sectors, forced technology transfers — are far from resolution. US Trade Representative Robert Lighthizer, who will lead the talks from the US side, will want concessions from Beijing on those issues that will be politically and economically difficult for Xi.

Meng’s arrest won’t cripple the talks on its own, but it makes an already difficult process much harder.