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Cyber espionage: China intensifies tech cold war

Stephen Mulrenan

China’s telecom giant Huawei is facing mounting scrutiny, with the US and other governments concerned that its market dominance poses a national security threat. Global Insight examines what’s at stake as the two superpowers compete for who controls global technology this century.

Long-standing concerns in the United States about Chinese tech giant Huawei – one of the world’s largest suppliers of telecoms equipment – have intensified in recent months. In August 2018, the US government introduced a ban on the use of Huawei’s equipment and services, citing national security fears.

America’s concerns are essentially that gear from Huawei that’s embedded in mobile and communications networks could be used by the Chinese government for spying and cyberattacks.

Huawei has strongly denied the accusations, and consistently clarified that it’s a private company not under Chinese government control and not subject to Chinese security laws overseas.

Even so, a number of other governments are now viewing the company as a potential security threat, particularly as Huawei is a global leader in the new generation 5G mobile networks that will drive the next tech advance.

The primary risk… at the heart of US concerns relates to whether Huawei is effectively acting as an agent for the Chinese government

Mauro Wolfe
Partner, Duane Morris;
Co-Chair, IBA Criminal Law Committee

Other developments – notably the high-profile arrest in Canada of Huawei’s chief financial officer in December on charges including fraud and Huawei filing to sue the US government over its ban – have stoked tensions further.

To many observers, the unfolding saga is a microcosm of the high-tech cold war that’s been taking shape over the last decade, as China and the US compete for who controls global technology in the first half of the 21st century.

Huawei is one of China’s ‘national champions’. These are businesses that support the Beijing government’s global strategic and economic aims, and in return receive easier access to funding and preferential treatment in government contract bids.

The company manufactures – and controls – a range of technology that can power vital communications networks. Able to conduct rapid prototyping of products to shorten time to market, Huawei made over $92bn in total revenue in 2017. Although the Chinese market remains key, it’s increasingly eyeing Asia and Europe to achieve its growth targets.

In July 2018, Huawei overtook Apple to become the world’s second-largest smartphone seller behind Samsung. Then its troubles began. The US, closely followed by Australia and New Zealand – three of the nations that make up the Five Eyes intelligence alliance – banned Huawei from selling its profitable network equipment. The other two countries, Canada and the United Kingdom, are currently reviewing their position.

Their concern – and that of many other nations – is over Huawei’s obligations to the Chinese government and the danger that poses to the integrity of telecoms networks in the US and elsewhere. In other words, that it could facilitate Chinese government spying on rival nations and disrupt communications.

Huawei… hampers US efforts to spy on whomever it wants

Guo Ping
Rotating Chairman, Huawei

‘The issue is the state control of China’s companies,’ says Robert Russell, Treasurer of the IBA North American Regional Forum and antitrust partner at Borden Ladner Gervais in Toronto. ‘There’s broad acknowledgment of the concern among the Five Eyes alliance of whether China, given its state control, might ever want to deploy such technology for such purposes.’

The problem is the company’s dominance of 5G. The new generation wireless network will be able to move data up to 20 times faster than the current 4G system. It’s expected to transform the delivery of many services, as more things, from self-driving vehicles to domestic appliances, become connected to the internet.

According to a recent Deloitte report, China is leading the race to be ready for 5G, ahead of Japan, South Korea and the US. To appreciate the significance of this, when the US won the race for 4G technology, it boosted the country’s GDP by nearly $100bn and set back the economies of Europe and Japan by a decade. In terms of its economic impact, 5G could be as significant as electricity, argue US telecoms company Qualcomm and tech analyst IHS Technology.

Mauro Wolfe is Co-Chair of the IBA Criminal Law Committee and a partner at Duane Morris in New York. ‘The primary risk that appears to be at the heart of US concerns relates to whether Huawei is effectively acting as an agent for the Chinese government and would allow China to use the technology for intelligence purposes,’ he says. ‘I do think that market dominance plays an important factor in persuading the US that such concern is warranted.’

The European Union has not entirely adopted the US concern, although the EU’s Technology Commissioner, Anders Ansip, said last December that the EU should be worried about Huawei and other Chinese tech companies, citing their potential risk to the bloc’s industry and security.

A ban… but no smoking gun

The US ban on Huawei last August came when President Trump signed off a provision under the 2019 National Defense Authorization Act (NDAA). It not only bars all US government agencies from buying Huawei equipment and services, but also stops them contracting with, or awarding grants or loans to, third parties who buy Huawei equipment or services.

But, while the US government has long-standing concerns over Huawei’s connections to the Chinese government (see box: Huawei – an unfolding saga), it has never provided any evidence to support this accusation. Wolfe says US policy will not be impacted by the lack of a ‘smoking gun’.

‘I cannot rule out that the US has a smoking gun but has chosen not to disclose it publicly for strategic reasons,’ he adds.

Huawei argues that the NDAA ban prevents it from providing more advanced 5G technologies to US consumers and will delay the commercial application of 5G. The US will miss out, it says, on savings of between 15 and 40 per cent on the cost of wireless infrastructure – the equivalent of $20bn over the next four years.

With this argument failing to gain any traction – much like the company’s apparent willingness to address the US government’s security concerns – Huawei went to great lengths to address its image problem. This included hiring legions of public relations advisers, launching the ‘Huawei Facts’ website and Twitter account, and conducting more interviews with Western journalists at its campus in Shenzhen.

In May 2018, in a further attempt to dispel concerns, the company commissioned a 37-page legal opinion from Chinese law firm Zhong Lun, which concluded that Chinese law cannot compel the company to gather intelligence against the interests of customers. The advice in the legal opinion was reviewed by Clifford Chance and submitted to the US Federal Communications Commission. Huawei also recently opened a cybersecurity transparency centre in Brussels, which is similar to an operation the company has in the UK that’s overseen by the cyber intelligence agency, Government Communications Headquarters (GCHQ).

Louis Huang holds a placard calling for China to release Canadian detainees Michael Spavor and Michael Kovrig outside a court hearing for Huawei Technologies Chief Financial Officer Meng Wanzhou at the Supreme Court in Vancouver, British Columbia, Canada, 6 March 2019 © REUTERS/Lindsey Wasson

Technology and trade wars

Yet, despite these efforts, Huawei has been unable to shift the narrative on from its founder Ren Zhengfei’s historical connections to the Chinese military and Communist Party – links that have fuelled the security concerns about the company. The long-term global importance of telecoms means Huawei is unlikely to be given the benefit of the doubt.

In many ways, the technology sector is at the forefront of the escalating trade war between China and the US, which has seen the two superpowers impose tariffs on billions of dollars worth of goods. In December 2018, at the G20 summit in Argentina, Presidents Donald Trump and Xi Jinping appeared to have reached a temporary truce when they agreed to halt new tariffs to allow for talks. However, that very same day, Huawei’s Chief Financial Officer Meng Wanzhou, the daughter of Huawei’s founder, was arrested in Vancouver on charges including fraud linked to the alleged violation of sanctions on Iran.

Meng is accused of conspiring to defraud HSBC and other banks by misrepresenting Huawei’s relationship with subsidiaries Huawei Device USA and Skycom Tech – companies that allegedly enabled Huawei to continue its Iran business in breach of US sanctions on the country. A second indictment alleges that Huawei stole technology used to test smartphone durability from T-Mobile, obstructed justice and committed bank and wire fraud.

Both Meng and Huawei deny all the allegations. ‘The Company denies that it or its subsidiary or affiliate have committed any of the asserted violations of U.S. law set forth in each of the indictments, is not aware of any wrongdoing by Ms Meng, and believes the U.S. courts will ultimately reach the same conclusion,’ it said.

Meng now faces extradition to the US, although China says the case against her is an ‘abuse of the bilateral extradition treaty’ between Canada and the US.

‘Canada is paying a big price for this,’ says Russell, ‘because China’s view is that this is a non-judicial decision. Antitrust law in Canada focuses on criminal conduct, so I don’t see a lot of room for the politics. China knows that Canada is not behind this, but they don’t want to attack the US directly. They’re attacking us because they want to make their position known.’

Although the US tried to reassure China that Meng’s detention and the charges against Huawei are not related to the trade tensions, this argument was somewhat undermined by President Trump when he said he could intervene if it helped to avoid a further decline in US relations with China. The President’s comments ‘made it look like Canada was merely carrying out Trump’s bidding,’ says Russell.

Wolfe adds: ‘It’s difficult to say, based on the scant record, whether the arrest of Meng was orchestrated to increase US leverage in a trade dispute, or whether this is more an incident being used to maximise an opportunity for negotiating leverage. Regardless, China does not appear to be abandoning its trade positions at the moment.’

While the Chinese government may not have controls and monitoring in place today, they may demand them of companies tomorrow

Former IBA Asia Pacific Regional Forum member

On the contrary, China has hit back strongly. Just a week after Meng’s arrest, the government in Beijing ordered the detainment of two Canadians working in China, Michael Kovrig and Michael Spavor, for ‘endangering state security’. The timing of their subsequent charges – coming just two days after the Canadian government decided to proceed with the extradition hearing for Meng – showed a very confrontational approach compared to the past, says a former member of the IBA Asia Pacific Regional Forum who wishes to remain anonymous. ‘The concern should therefore be about how disproportionate the response will be to other incidents abroad that are not to the liking of Beijing,’ he says.

China’s foreign ministry spokesperson, Lu Kang, said Kovrig and Spavor’s detention was not in response to Meng’s arrest.

Yet, a few days earlier, Lu had warned Canada of ‘severe consequences’ for the continued detention of Meng. One China-based Western diplomat described their arrests as a ‘political kidnapping’.

On 1 March 2019, Meng also hit back when her lawyers filed a civil lawsuit in the British Columbia Supreme Court against the Canadian government, its border agency and federal police. The suit described her detention as ‘unlawful’ and ‘arbitrary’, and accused officers of ‘intentionally failing to advise her of the true reasons for her detention, her right to counsel, and her right to silence’.

Then, on 7 March, Huawei filed a lawsuit to sue the US government over the NDAA ban. The complaint filed in a US federal court challenged the constitutionality of Section 889 of the NDAA – the provision used for the ban – and sought a permanent injunction against restrictions targeting the company.

‘After exhausting all other means to allay the doubts of some US lawmakers, we are left with no choice but to challenge the law in court,’ said the company’s Rotating Chairman, Guo Ping.

‘In signing the 2019 NDAA,’ says Glen Nager, a partner at Jones Day in Washington, DC, acting as lead counsel for Huawei, ‘the President of the United States objected that provisions of the NDAA raise significant separation of powers concerns and reflect congressional overreach. The lawsuit that we have filed raises similar objections.’

Specifically, the objections are that Section 889 violates the Bill of Attainder and Due Process clauses, as well as the separation of powers principles, enshrined in the US Constitution (because Congress is both making the law, as well as attempting to adjudicate and execute it).

In 2018, a Russian cybersecurity company, Kaspersky Lab, unsuccessfully filed lawsuits against a similar ban. The ban ordered US federal agencies to stop using the company’s software, alleging it could be used for espionage by Russia. A judge upheld the ban and the company lost a subsequent appeal.

Fred Chilton is former Vice-Chair of the IBA Technology Law Committee and a partner at Emil Ford Lawyers in Sydney. ‘If it were an Australian court handling the matter,’ he says, ‘we do have a constitutional prohibition on taking property without compensation. However, there would be several difficulties for plaintiffs to overcome. Whether a future potential market is “property” would be the first. The second would be the tendency for courts in our country to accept government statements when it comes to national security issues and not seek to go behind them.’

The former IBA Asia Pacific Regional Forum member believes ‘the case lays bare the fundamental differences between the political systems of the countries: namely, that it’s not possible to separate Huawei from Chinese state interests.’

China’s national intelligence law

A London-based spokesperson for Huawei tells Global Insight that, of all the legal issues it currently faces, the one that is most misunderstood is China’s 2017 National Intelligence Law. This has led Western media outlets to misinterpret its implications for the company.

For example, the Australian Strategic Policy Institute says the intelligence law obliges Huawei and all other Chinese companies to ‘support, assist and cooperate with state intelligence work’. But, according to Huawei, the Chinese government has clarified that it will never ask companies to install backdoors – secret entry points in software or a computer system – and that, even if it did, it would not make commercial sense for Huawei to do it.

We need a collaborative international effort to define globally accepted security standards. The solution to cyber security will not come through political posturing

John Suffolk
Global Cyber Security and Privacy Officer, Huawei;
Former Chief Information Officer, UK government

Misinterpretation of the law has led Huawei to speculate on there being possible hidden agendas at play. For example, in an opinion piece in the Financial Times on 27 February, company Chairman Guo accused the US of hindering Huawei in order to help its own companies and intelligence agencies: ‘Huawei… hampers US efforts to spy on whomever it wants.’

In a statement issued in conjunction with the company’s 7 March lawsuit, Guo said: ‘We question [the US government’s] intent of not wanting other countries to use Huawei: is it afraid that other countries may catch up to and overtake it, using our advanced 5G technologies?’

Federica D’Alessandra is Co-Chair of the IBA Human Rights Law Committee and founding Executive Director of the Oxford Programme on International Peace and Security at the Institute for Ethics, Law and Armed Conflict. ‘Because of the law, and because of a lack of agreement with Huawei over what safeguards can reasonably be put in place by Huawei to avert some of these risks in foreign countries, these risks seem heightened,’ she says.

Chilton adds: ‘Whether any privately owned Chinese company is able to withstand pressure from the Chinese government to assist the government pursuant to the legislation, which has been cited by the US, Australia and others, is an open question.’

Others are less diplomatic. ‘China… does not have to add wording to laws to dictate what private enterprises on their soil need to do or not do,’ says the former IBA Asia Pacific Regional Forum member. ‘While the Chinese government may not have controls and monitoring in place today, they may demand them of companies tomorrow. Chinese security interests will always trump commercial interests. The opinion of Huawei in that case would not be that relevant.’

The problem for the US and other states that ban Huawei’s equipment and services is that their tech companies are likely to struggle to fill the void. This lends weight to Guo’s argument that restricting Huawei’s contributions to the 5G networks of America and other nations will only harm their national interests.

With Huawei equipment equal to, if not exceeding, other suppliers in terms of quality and performance, its availability at a cheaper price will ensure that much of the world continues to look to China for innovation and collaboration. In the US and elsewhere, a compromise is therefore needed between the private sector’s desire for cheap imported technology and the concerns of intelligence agencies fearful of China’s cyber threat.

Rather than continuing to isolate itself from China’s lead in the supply of 5G and internet connectivity, the US could look to an approach of controlled engagement with Chinese tech companies like Huawei. This was recently suggested by John Suffolk, the British government’s former Chief Information Officer, who’s now Global Cyber Security and Privacy Officer at Huawei.

‘What we need is a concerted, collaborative international effort to define globally accepted security standards, certifications and best practice,’ he said. ‘The solution to cyber security will come from openness, agreed international standard certification schemes and transparency. It will not come through political posturing.’

Stephen Mulrenan is a freelance journalist. He can be contacted at stephen@prospect-media.net