China, US Shuffle Security Card 中美互打安全牌

New noises are coming from both China and the US on the dangers to national security posed by  commercial activities in the high-tech space, as fallout continues to linger from the recent Washington decision to ban Huawei and ZTE (HKEx: 763; Shenzhen: 000063) from selling their equipment in the US. Some might say this new flare up in trade relations is just an extension of other recent similar tensions between Washington and Beijing, whose complaints of unfair trade against each other have accelerated over the last year. But this latest trade war looks a bit more worrisome, since it’s leveled at the high-tech sector whose products are considerably more valuable than the usual lower tech products usually involved in many of these disputes.

What’s more, the national defense excuse for erecting trade barriers is very broad and imprecise, and the process for determining what constitutes a threat is highly secretive and lacking in transparency. That could open the way for abuse of this excuse anytime Washington or any other government feels threatened by high-tech products from another country.

Now that I’ve spelled out some concerns about this escalating new trade war, let’s take a look at the latest developments that could deal some serious blows to foreign trade and cross-border acquisitions in the lucrative communications space. The first of those has a US trade group opposing the acquisition of a bankrupt US battery maker by a Chinese firm on national security grounds.

The US group, called the Strategic Materials Advisory Council, is claiming the sale of bankrupt A123 Systems to Chinese auto parts maker Wanxiang Group threatens US national security because A123 supplies batteries used national defense-related products. (group statement) On that basis, the council urges the US to veto the purchase, which it says would result in the transfer of sensitive technologies to China.

The second news bit comes from China, where media are reporting that a government Internet agency has published data that show equipment from US companies has the same weaknesses previously cited in Washington’s controversial report on Huawei and ZTE. (Chinese article) The media reports go on to single out US telecoms equipment giant Cisco (Nasdaq: CSCO) for special mention, perhaps because the company is the only major US-based company in the telecoms equipment sector. Cisco made similar headlines shortly after the original Huawei-ZTE controversy broke out last month, as Chinese media reported that telecoms operator China Unicom (HKEx: 762; NYSE: CHU) had removed some Cisco equipment from its networks due to security concerns. (previous post)

This kind of lingering fallout from a big decision like the one in Washington is certainly normal and so shouldn’t be too alarming just yet. But if similar signals keep coming and we start to see Washington and Beijing veto more deals due to national security concerns, it could mark the beginning of a protracted downturn in cross-border trade and M&A in the important communications sector.

Bottom line: New signals from Beijing and Washington look like lingering fallout from a dispute locking Huawei and ZTE out of the US market, and could auger a prolonged high-tech trade war.

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