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How China could retaliate against US and Canadian companies over Huawei

Canadian and US companies are bracing themselves for fallout from the arrest of a top execu...

Posted: Dec 12, 2018 10:20 AM
Updated: Dec 12, 2018 10:20 AM

Canadian and US companies are bracing themselves for fallout from the arrest of a top executive at Chinese tech giant Huawei.

Meng Wanzhou, Huawei's chief financial officer, is out on bail after sitting in a Canadian jail cell for more than a week. She faces extradition to the United States, where she is accused of helping Huawei dodge sanctions on Iran.

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Huawei is key to China's ambitions to become a global tech leader. It sells more smartphones than Apple (APPL) and is the world's largest telecommunications equipment maker. Meng is the daughter of the company's founder, Ren Zhengfei.

Beijing is unlikely to let the arrest of a senior executive from an elite family go unanswered, experts say, and companies should prepare for possible blowback.

"There will be retaliation. Guaranteed," said Edo Naito, a Tokyo-based business lawyer and former executive for multinational companies including General Electric (GE). Naito has been doing business with China since the 1980s.

Locking up execs

One risk is that Chinese authorities could detain a US or Canadian business executive in a tit-for-tat response. President Donald Trump's suggestion Tuesday that he could use Meng as a pawn in trade negotiations will likely only increase those fears.

"If I was a Western CEO, I would not want to be in China," said Christopher Balding, a China expert at the Fulbright University in Vietnam.

Several leading Silicon Valley executives are worried about the possibility of tit-for-tat arrests in China following the detention of Meng, according to an op-ed article by veteran tech reporter Kara Swisher in The New York Times.

Adding to the jitters, the International Crisis Group said Wednesday that Chinese security services in Beijing have detained its northeast Asia senior adviser, who is also a former Canadian diplomat. The Chinese government has detained foreign employees of nongovernmental organizations in the past but infrequently.

Nationalist backlash

Some Chinese companies and business groups are already encouraging employees to boycott Apple (AAPL) and other US suppliers and buy Huawei products instead.

If the Chinese government allows the nationalist outcry to intensify, it could lead to violent protests against US and Canadian interests in China, including well known brands. That's what happened in 2012 when Japanese businesses in China were targeted by demonstrations over a territorial dispute.

"If I was General Motors China or KFC, I would get prepared," Naito said.

Other geopolitical flashpoints have left international companies exposed.

Anti-US protestors targeted KFC, McDonald's (MCD) and other US brands in China in 2016 following an international tribunal's ruling over the South China Sea.

Last year, South Korean companies like Lotte and Hyundai Motors (HYMTF) were caught in the middle of escalating tensions with China over the deployment of a controversial US missile defense system.

Regulatory crackdown

Kimberly Kirkendall, president of International Resource Development, a company that helps US firms establish a presence in China, said she has heard from dozens of businesses since Meng's arrest, all of them worried about retaliation.

If Meng is extradited to the United States, Kirkendall says US companies can expect retaliatory measures such as slower processing of visas and increased enforcement of regulations.

The Chinese government "may choose to expend more resources auditing US and Canadian companies," she said. "It would be satisfying to them to showcase US companies who are breaking the law. Non-compliant companies need to get their business in order. Quickly."

During the standoff with South Korea last year, Chinese authorities shut down dozens of Lotte stores, citing issues such as fire safety regulations. They also halted the construction of a Lotte theme park in northeastern China.

China could also hold up major deals. Its decision to block American chipmaker Qualcomm's (QCOM) $44 billion takeover of Dutch rival NXP (NXPI) on antitrust grounds earlier this year was widely seen as a result of trade tensions with Washington.

Cyberattacks

China could also hit back at Canada and the United States through cyberattacks.

"Unfortunately [cyberattacks] are always a possibility with China," former Canadian Ambassador to China David Mulroney said in an interview with Canadian broadcaster CTV last week.

"China plays it rough in these situations," he said.

Canada's top cybersecurity official said the country is prepared for possible retaliation over Meng's arrest.

Scott Jones, director of the Canadian Centre for Cyber Security, declined to directly answer any questions last week in relation to Meng's case, but added: "We always have to be resilient no matter what the possible trigger could be, so we increase our resilience against any form of malicious activity that we could be facing as a nation."

Play it cool

Some China experts believe Beijing is reluctant to retaliate as it tries to negotiate a deal with the Trump administration to end the trade war.

"My sense is the decision makers are keeping cool heads on this," said William Zarit, president of the American Chamber of Commerce in China.

"It really could get in the way of a resolution on the trade friction," he added. "I don't think the Chinese want to muddy the waters in this way."

But Trump's suggestion that he could intervene in the Meng case if it would help get a trade deal with China have added a new unpredictable element.

"If I think it's good for what will be certainly the largest trade deal ever made — which is a very important thing — what's good for national security — I would certainly intervene if I thought it was necessary," Trump told Reuters in an interview published shortly after Meng was granted bail.

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