Huawei CFO arrest has trade and FDI implications

In early December the US sent a shot across the bows of China that arguably had as much of an impact on relations between the two countries as has the escalation of respective tariffs over the past several months. The shot took the form of an arrest: that of the chief financial officer of Huawei Technologies, Meng Wanzhou, during a layover in Vancouver, Canada while she was en route from Hong Kong to Mexico.

Ms Meng now faces extradition to the US on charges alleging fraud while conducting business that did not comply with US sanctions on Iran. Specifically, the US is alleging that Huawei circumvented US sanctions via a Hong Kong-based shell company called Skycom in order to transact business with an Iranian telecommunications company. 

Ms Meng has been singled out because she reportedly misrepresented Huawei’s role in this transaction to several banks when they asked about it following a Reuters news article on the matter. 

Her arrest happened the same day that US president Donald Trump and Chinese president Xi Jinping agreed to a temporary truce in the trade war that has emerged between the two countries this year. Very likely the timing was coincidental and based on Ms Meng’s movements but the arrest has infuriated China, which has been protesting her arrest vigorously. 

High-level officials in China have been very vocal, including China’s vice foreign minister, Le Yucheng, who said China will take “further action” if needed. Meanwhile, in the US, Ms Meng’s arrest sent the country’s stock market reeling, as investors worried tensions between the US and China would rise even further.

There is no doubt that both nations have signalled their desire to scale back the trade and tariff tensions, but Huawei’s size and heft will likely make that difficult. Simply put, Huawei is China’s largest telecom equipment maker and the world’s top supplier of mobile phones, with sales topping that of Apple’s.

Also, according to fDi Markets, the company is the most prolific outbound Chinese investor company globally, with operations in many countries. It has sited 314 greenfield investments in foreign countries since 2003 including eight in the US. In June 2017, for example, the company announced it was planning to set up research and development centres in the US that would focus on the development of virtual, augmented and mixed reality products and applications.

The US has been trying to keep Huawei’s product out of the country, however, alleging that its devices are vulnerable to espionage, and it has pressured US allies not to use the technology either.  How much it will use its laws and regulations to ban Huawei’s products and activities from the US following Ms Meng’s arrest is an open question, but it should be noted that the US recently strengthened the provisions of the Committee on Foreign Investment in the United States, making such moves easier.

It is also hard to imagine Huawei not taking Ms Meng’s arrest as a personal affront as she is the daughter of Huawei’s founder. 

On December 11 she was granted bail.