(Mr. Ben Mah, author of America and China, America and the World, America in the Age of Neoliberalism, and Financial Tsunami and Economic Crisis – The End of American Hegemony, is a frequent contributor to this website.)
At the 2011 World Economic Forum in Davos, the annual gathering of the global elite, a discussion was held to marks the 10th anniversary of China’s WTO entry. China’s commerce minister boastfully declared that “China’s WTO membership will be a new starting point for China’s further opening,” as China’s GDP has more than doubled since 2001. Pascal Lamy, director-general of the WTO weighed in, stating his position that “China’s membership is a win-win deal for China and the rest of the world.”1. According to Mr. Lamy: “Apart from enhanced market access with its trading partners and more equal treatment in global trade, WTO membership also has allowed China to gain access to the organization’s dispute settlement system.”1.
Unfortunately for China’s commerce minister, the use of GDP as a measurement for economic progress has long been discredited, as in the case of Egypt, where, despite reports of a 7% increase in GDP for a number of years, prosperity for a few has increased, as has poverty for the majority. The increase in poverty led to a mass revolt with the overthrow of the Mubarak government. Most ominously, GDP growth does not take into account environmental degradation and resource depletion. Similarly, one has to question the accuracy of Mr. Lamy’s assertion that China has achieved market access and more equal treatment with its trading partners. In this regard, China’s telecom giant Huawei’s horrible business experiences in America for the past decade have completely exposed the fallacy of the American version of free or fair trade and national treatment for foreign direct investment. Too often political interference and administrative measures have been used as a disguise to advance America’s business interests. The unfair treatment accorded to the Chinese firm reveals the ugly nature of U.S. protectionism. In the U.S. domestic market, Washington and American industry have employed all means—political and legal—to shut out rising Chinese rivals such as Huawei. In China, American multinationals, taking advantage of China’s policy of welcoming foreign investment with open arms, have increasingly dominated the sensitive telecom industry, as China, perhaps naively, opened up her market to American multinationals such as Cisco.
Thanks to Deng’s Open Door policy, by 2000, “Cisco was overwhelming[ly] dominant in China’s data transmission equipment market, taking away more than 90 percent of all the local sales.”2. However, with the emergence of indigenous enterprises such as Huawei, ZTE Corporation and Digital China, Cisco faced an unforeseen threat from its low-cost Chinese competitors. In order to stop Huawei’s momentum and tarnish its reputation, Cisco adopted a strategy of employing legal tactics in an attempt to discredit the rising competitor soon after Huawei entered the American market. Cisco commenced action before the courts in Texas, “accusing the Chinese company of copying some of its operating codes, routers and switches without permission as well as violating at least five of its patents.”2.
After 20 months of legal wrangling, Cisco’s case was dismissed “with prejudice” and, “Cisco cannot bring another lawsuit against Huawei in the future asserting the same or substantially similar claims.”3. The court ordered that each party was responsible for its own legal costs.3. Unfortunately, Huawei’s apparent “victory” was only a pyrrhic one, as Cisco achieved its objective of tarnishing Huawei’s brand and reputation by accusing the company of stealing intellectual property, as one American commentator aptly noted:
“The case ended in a court settlement with Cisco withdrawing its suit against Huawei with no further requests for Huawei to make any changes to its products. There was no concrete evidence that proved Huawei had infringed on Cisco’s intellectual property, but even long after the case was dismissed, Huawei continues to be dogged with a reputation for IPR infringement despite the company’s track record for innovation.”4.
Subsequently, Huawei suffered another major setback when she tried to be a minor partner in the $2.2 billion acquisition of 3Com, a second-tier U.S. technology company. A mere 16.5% stake for Huawei in this acquisition was the reason used by U.S. lawmakers and Bush administration officials as a cause for concern that sensitive military technology could be transferred to China. Washington politicians, many of them with close connection to American multinationals, alleged Huawei had ties with China’s Liberation Army.5.
Obviously, many of these accusations against Huawei also apply to U.S. businesses, as no one can deny that Cisco, Boeing, Motorola and HP have close military ties: they have all been awarded contracts with the U.S. Department of Defense. The objection to the proposed Huawei acquisition provided an opportunity for Hewlett-Packard to purchase 3Com. While U.S. authorities easily blocked the Huawei acquisition of a minority stake in 3Com, which has 50% of its business in China, HP expected no problem with China’s regulatory approval, and indeed completed the transaction without any problem. This is in sharp contrast to the scenario faced by Huawei in the U.S. It is remarkable that the China regularity authority, especially the Ministry of Commerce, took no retaliatory action against the U.S. firm, despite the fact that the equipment sold by 3Com “is used in Chinese backbone networks including those for its energy and transportation sector.”6.
HP’s gain is Huawei’s loss, as according to HP, the addition of “the 2,500 China-based engineers HP will gain from 3Com is one of the most attractive aspects of the deal.”6. This is also one of the most negative aspects of China’s Open Up under which the Chinese skills and intellectual capital have been efficiently exploited. This appears to be another example where China’s economic Open Door Policy has been used for the service and profit of multinationals in their quest for dominance of the Chinese market.
Obviously, one of the ways for U.S. firms to achieve dominance over their Chinese rivals is to block Chinese firms from playing the acquisition game. In recent years, growth through acquisition has been a key development strategy for U.S. high tech firms. Accordingly, Huawei was denied once again the opportunity to buy 2Wire Inc. and Motorola’s wireless-equipment unit, even when it offered $100 million more for each unit. Huawei’s proposals were rejected by the vendors on the flimsy excuse that Huawei could not obtain regulatory approval.7.
Unfortunately for Huawei, approval was once again not forthcoming when Sprint-Nextel excluded Huawei and China’s ZTE from bidding on a $5 billion contract, even when they were the front-runners from the beginning of the tendering process as they came up with the lowest prices. The denial became a fait accompli after U.S. Commerce Secretary Garry Locke voiced his concerns about the Chinese companies on national security grounds. The U.S. Department of Defense is also said to be troubled about Huawei’s “possible ties to the Chinese government supply local communications infrastructure.”8. Eight Republican senators, many of them with close tie to Big Business, also voiced similar concerns. The Senators further alleged that Huawei had ties to Saddam Hussein’s Iraq, Iran, the Chinese Liberation Army, and that the Chinese company should not be allowed to do business in America.8.
Such unfair comments on the part of U.S. senators led one American commentator to state the following: “Cisco Systems, Hewlett-Packard, Motorola and other major U.S. high tech companies should be barred from doing business in China. That’s the logical conclusion I would draw from a letter from eight U.S. Senators to the Obama Administration asking it to investigate Huawei Technologies.”9. In a rebuttal to the eight Republican senators, the writer stated “there are probably few U.S. high tech firms that have not participated in multimillion dollar programs at the Defense Advanced Research Projects Agency… And I suppose no member of the U.S. intelligence community has ever approached Cisco, HP or Motorola about bugging a PC, base station or router in Beijing.”9. As for the Chinese companies doing business with Iran and Saddam Hussein, U.S. companies also have flourishing relationships with Taiwan. The commentator concluded that “It would be interesting to trace what donations certain competitors have made to these senators.”9.
In sharp contrast to this fair-minded U.S. commentator, China’s response to this naked American protectionism and unfair treatment for Chinese companies in America was exceedingly mild and unsubstantial. China’s Washington embassy and Ministry of Commerce in Beijing issued the following statement: “We hope that some people in the U.S. will take a rational approach toward these normal commercial activities rather than do anything to stand in the way by abusing national security concerns.” 10. Unfortunately, such a meek response serves no useful purpose for China, as America does not respect a position of weakness. The WTO dispute settlement mechanism as mentioned by Mr. Lamy is also useless. Unless China takes the resolute action of sanctions against U.S. multinationals in China for such obvious trade and investment violations, Chinese tech giants will have no chance of broadening their presence in America, and Chinese companies such as Huawei will continue to experiencedifficulties doing business in the United States, even after it hired expensive U.S. public relations firms and engaged former Defense Secretary William Cohen to lobby on its behalf.
Huawei experienced difficulty in America once again when they attempted to buy certain assets of 3Leaf Systems. Under the asset purchase deal, Huawei hired 15 3Leaf employees, purchased servers and several patents from 3Leaf in bankruptcy. However, the Committee on Foreign Investment in the United States ruled that Huawei “must divest the company or the committee will make a recommendation to the U.S. President that the deal be unraveled.”11. For Huawei, this is another major setback, as it will further tarnish its reputation and damages the firm’s credibility due to the fact that the company could not even complete a mere $2 million asset purchase in America. In normal circumstances, regulatory approval is not required for such an asset purchase.11.
The nasty experiences Huawei has had in America clearly show that Washington will do whatever it takes to throttle the emergence of new global competitors, especially a home-grown multinational corporation from China, as the U.S. has always perceived China as its major rival. In this regard, President Obama has openly stated that the United States does not want anyone starting an ‘Intel’ in China. It is in America’s strategic interest to stop the first Chinese multinational, Huawei, in its tracks, for fear that it will serve as a model for other emerging Chinese companies.
In fact, the emergence of global enterprises from China has been keenly watched in the international business community. In many ways, it has been a vexing phenomenon. While the Chinese are exhibiting scientific prowess in the field of space exploration and other cutting edge technologies, and boast overwhelming numbers of science and engineering graduates, China still possesses only a few corporations capable of competing globally. China’s neighbors Japan and South Korea, who have protected their industry by restricting foreign direct investments, both have world class corporations with many global brands. One can strongly argue that China’s absence of world class corporations is a result of embracing globalization, neoliberalism, free trade and the implementation of the onerous terms of the WTO entry agreement.
It is ironic that while the United States would not allow China’s Huawei to buy a mere $2 million in assets from a bankrupt U.S. technological company, China under the terms of WTO treaty, would allow foreign firms to own up to 49 percent of a strategic industry such as telecommunication. In the Western financial market, 30-40 percent stake in a given corporation is considered effective control. Why would the Chinese people be willing to surrender their telecommunications and public utilities to foreign firms and relinquish control of their national destiny? What is most puzzling is that in light of the strong resistance to the Chinese acquisition of American firms in Washington, the Chinese minister of commerce is still calling for further opening. The minister, like many of the policymakers in China, woefully forgets one irrefutable fact: today’s economic super powers that possess vast multinational corporations with global brands all became successful and rich by employing protectionism to protect their infant industries. The experiences of Huawei in America, the rejection of the Chinese acquisition of Unocal should be a wake-up call for Chinese policymakers to the fact that WTO membership is not a win-win deal on the Chinese side, and that there is no such thing as equal treatment in global trade.
Notes:
1. Beijing Today: “Playing under the WTO—A review of 10th anniversary of China’s accession”, February 11, 2011
2. China.org.cn: “Cisco considered upset by rising competitors”, January 31, 2—3
3. Leyden, Jack: “Cisco drops Huawei lawsuit”, July 29, 2004 the Register.co.uk
4. World of dth.com: “Motorola and Huawei—Two tech Giants locking horns”, March 29, 2011
5. Einhorn, Bruce: “Huawei’s 3Com Deal Flops”, February 21, 2008 Businessweek.com
6. Fletcher, Owen: “HP-Cisco Battle Spreads to China with 3Com deal”, November 12, 2009 pcworld.com
7. Saitto, S. & McCracken, Jeffrey: “Huawei said to loose out on U.S. assets despite higher offers”, August 2, 2010 Bloomberg.com
8. Engadget.com: “Sprint axes Huawei, ZTE telecom bids due to security fears in Washington”, November 6, 2010
9. Merritt, Rick: “Why China should ban Cisco, Moto and HP”, August 23, 2010 ee/times.com
10. Barboza, David: “Scrutiny for Chinese Telecom Bid”, August 22, 2010 New York Times
11. Telecompaper.com: “Huawei told to drop 3Leaf acquisition in U.S.”, February 15, 2011
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