The Problem with Huawei and ZTE

The U.S. House Intelligence Committee recommended yesterday, October 7, 2012, that the U.S. Government not do business with two Chinese technology companies, Huawei and ZTE, and other companies should avoid conducting business with them. The report raises questions about the balance between free trade and security. The report, which is bipartisan,was based on a yearlong investigation and supposedly discovered evidence of potentially criminal conduct that is being turned over to the F.B.I.  On the eve of the report the television show 60 Minutes had a report on Huawei and the Intelligence Committee investigation.

 Huawei makes a variety of "white label" products (products rebranded and sold by other companies) for computer wired and wireless networking and internet usage, consults on networking and internet service, and makes smartphones and tablet PCs.  It is the largest telecom equipment maker in the world, and it leads or is second in many other computer equipment and infrastructure markets. ZTE is the fifth largest telecom equipment maker in the world. According to Wikipedia, "ZTE's core products are wireless exchange, access, optical transmission, and data telecommunications gear; mobile phones; and telecommunications software." Huwai's founder and chair and likely major stockholder, Ren Zhengfei (任正非), is a former major in the People's Liberation Army and a member of the communist party, though he was denied membership for a time because his family had ties to the Kuomingtang (the anticommunist Chinese Nationalist Party now in Taiwan). ZTE was formed from several PRC run aerospace organizations.

Concerns about the companies are not unrealistic. Huawei, notably, has been implicated in the past in corporate espionage, and the NYT's article says "[the] panel’s report said the committee had obtained internal documents from former employees of Huawei that showed it supplied services to a “cyberwarfare” unit in the People’s Liberation Army. Huawei stock also does not trade in the United States, which (whether intentional or not), insulates it from corporate reporting requirements. Both companies assert they are being maligned and assert they conduct their business in a transparent fashion.

The problem with all of this, from a U.S. perspective, is that it limits competition in our markets. If free markets are the be-all and end-all -- if the core of the U.S. system is, for some reason, complete laissez faire -- then it is unclear how such regulatory conduct -- here only a suggestion, by the way, not final regulations -- have any place. Yet, it also seems that advocates of free markets in the U.s. also often seem to be opponents of international competition.  The reality is that some regulation is necessary, within a country and between countries.