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Saga has further damaged myth of Chinese invincibility
Events since Washington banned ZTE from purchasing U.S. parts have revealed the limits of rival superpower's state-capitalist model

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Saturday, December 8, 2018 – Page A5

BEIJING -- ZTE Corp. boasts that it is China's 26th-most valuable brand, a telecommunications giant that ranks among the world's top manufacturers of smartphones.

Yet, it took Washington only a few weeks to shut the company down this spring by banning its purchase of U.S. components. On May 9, ZTE said it could no longer continue to operate.

Soon after, the United States reversed its action against the company, letting it spring back to life.

But the myth of Chinese invincibility had been punctured, a moment that looms over everything that has happened since: rapidly escalating trade friction; rising worries about a new cold war; a global campaign by the United States to stymie the spread of Chinese telecommunications technology; and now, the arrest of Meng Wanzhou, the chief financial officer of Huawei Technologies, the company in the crosshairs of that campaign.

"The aggressive actions by the Trump administration are based on a belief that China's economic and political position are far weaker than Beijing admits," said Jude Blanchette, who leads the China practice for Crumpton Group, a strategic advisory firm based in Arlington, Va.

Ms. Meng's arrest at Vancouver airport on Dec. 1 has roiled stock markets around the world and has made Canada the inadvertent custodian of a top executive of China's largest private company, raising fears about Chinese retribution.

But it has also placed Ottawa in a fraught position between jostling superpowers battling for the primacy of their corporations and the influence of their vastly different systems of governance.

What is taking place between the United States and China is "geopolitical warfare being slugged out in the trenches of the digital technology market," said Mike Gow, a lecturer in international business at Britain's Coventry Business School.

It was only a decade ago that China staged a jaw-dropping spectacle at the Summer Olympics. Then, its leadership orchestrated an even more stunning performance: Beijing's deft navigation of the global financial crisis, which left deep gouges on the Western world but barely scratched China.

In the years that followed, the country began to take on an air of invulnerability. Western observers openly expressed awe at its achievements - its explosive accumulation of patents and scientific publications, its futuristic cities, its riotous economic expansion - and warned of the ways that China, with its efficacious centralized political system, was eclipsing a fractured West. Economists began to debate the year in which the Chinese economy would surpass that of the United States.

Then came the day ZTE stood humbled.

"The Chinese certainly realized firms such as ZTE are far weaker than they once thought," said Dali Yang, a political scientist who specializes in China at the University of Chicago - but that's not to say China will cave to U.S. demands.

Still, the ZTE experience has added impetus to the U.S. actions against China, led by a White House studded with advisers who have long warned that China poses an existential threat to the United States.

Indeed, distinct ideological contours have shaped the U.S.

bid to escalate tariffs and block the spread of Huawei technology, an effort that claimed another success on Friday with Japan considering a ban on government purchases of ZTE and Huawei equipment.

"It got to a point where we really can't deal with a big country that's based on state capitalism and discriminatory economic policies," said William Zarit, chairman of the American Chamber of Commerce in China.

What China has accomplished with Communist Party rule may be incredible, "but I think what's missing in the narrative there is that they wouldn't have done it without the support of the West.

And so I think the miscalculation that's being made right now on the Chinese side is thinking that it was their system," said Mr.

Zarit, a Beijing-based senior counsellor with the Cohen Group, a strategic advisory firm.

"If the trade war goes like I would like to see it go, it would help open up the economy.

Which is good for China - and it's good for the rest of us, too."

In some ways, however, the opposite is also happening. Chinese President Xi Jinping has called for China to reduce its dependence on the United States, whose efforts to undermine Huawei are seen in Beijing as an attempt to thwart China's development. Huawei is among a group of major Chinese digital companies that have invested heavily in artificial intelligence (AI), as the country's leadership seeks to leapfrog Western dominance of other modern technologies and build advanced computing into a new economic pillar.

The United States wants "to curtail their AI capabilities," said Phill Hynes, an independent risk consultant with extensive experience in China. But in doing so, "they're going to force China to become self-reliant."

At the same time, the trade war has forced China to grapple with its own limitations. This summer, the editor of China's Science and Technology Daily, Liu Yadong, prompted gasps - and more than a few murmurs of agreement - when he declared the gap between China and the West remains "large."

U.S. influence has also been reinforced by its ability to push allies away from Huawei. Australia and New Zealand have blocked the company's next-generation wireless technology, and intelligence experts in Britain and Canada have urged their countries to do the same.

"It could put China in a vulnerable position if other countries join their camp, echo the U.S. and say no to our technological innovations," said Su Hao, founding director of the Center for Strategic and Peace Studies at China Foreign Affairs University.

China "has gone through a moment of truth," said David Kelly, research director at China Policy, a Beijing-based advisory firm. "There is a testing of assumptions going on, particularly of market mechanisms versus state-planning mechanisms."

Still, even if the United States wields power over China's technology sector, it's not clear what it can accomplish - a matter of profound importance for the world's two largest economies.

"Many of the changes the U.S is asking for cut to the heart of the Communist Party's hold on power," Mr. Blanchette said, "and thus are non-negotiable."

With reporting by Alexandra Li

Associated Graphic

When the United States banned Chinese telecom giant ZTE, whose sign is seen on a building in Beijing, from purchasing U.S. components, the Chinese government realized such firms are far weaker than it once thought.


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