TELECOMS: Cybersecurity Trade Wars Take Pause
Bottom line: Beijing’s delay of new rules for foreign tech firms selling to Chinese banks could mark a turning point in a looming trade war centered on cybersecurity, and Washington should move to take reciprocal action.
After months of heating tensions, we’re seeing a sudden pause in the growing friction between China and the west that looked set to erupt into a new trade war centered on the sensitive issue of cybersecurity. That’s my assessment on reading that China is delaying implementation of draconian new requirements that would have forced all foreign tech firms to hand over sensitive and highly confidential product information when selling to Chinese banks.
I’m certainly not being naive in believing that China’s delay in this instance is the result of its realization that there’s no security risk posed by products supplied by foreign tech giants like IBM (NYSE: IBM), Cisco (Nasdaq: CSCO) and Oracle (Nasdaq: ORCL). Instead, this delay is almost certainly the result of repeated protests from the companies themselves and also from Washington and Europe, which all argue the new requirements are overly and unnecessarily intrusive.
We’ll have to wait and see how Beijing ultimately acts in this situation, and whether it modifies the draft national security law that’s the source of the onerous new requirements. But in the meantime, I might add my own view that Washington might consider making a reciprocal move to show some good will on this simmering issue. It could make such a gesture by officially scrapping its own informal ban on the import of telecoms networking equipment from Chinese giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063).
I’ll return to the bigger picture shortly, but first let’s look at the latest development from Beijing that looks relatively encouraging. According to the reports, which cite a senior official from the US Treasury Department, China will formally delay implementation of new requirements that would have made foreign tech firms release information like their product source codes before they could sell to Chinese banks. (English article)
The treasury official made his remarks in Beijing after meetings between a US delegation that included Treasury Secretary Jack Lew, and a Chinese delegation of senior officials that included Premier Li Keqiang. The high rank of the officials shows just how seriously both sides are taking the issue. The broader cybersecurity spat began as a mostly a political issue in the months after revelations of electronic eavesdropping from the Edward Snowden scandal, but has spiraled into the trade realm in the last year.
Wording in the newest reports underscores that Beijing has simply agreed to delay implementation of the proposed new requirements, and isn’t scrapping them. But the move comes just a week after the US posed questions to China at the World Trade Organization (WTO) over the new rules, asking Beijing to explain the reasoning for its unusual actions. (previous post) That hinted that the US might file a formal WTO complaint if Beijing failed to provide a satisfactory explanation for why products from major western tech companies might provide a national security risk.
I’ve always been a bit puzzled at why China feels that foreign-supplied equipment might pose a national security risk, as no other country in the world has ever voiced similar objections. At least part of the reason may be retaliatory, following the US decision in 2012 to informally ban the import of all networking equipment from Huawei and ZTE. That move was made over concerns that the companies’ products might contain backdoors and other security risks due to suspected but unproven links to Beijing.
Huawei and ZTE have both protested that they are independent of Beijing and that their products are secure and untainted by government interference. I tend to believe that view, since both companies have been selling for a long time now to a wide range of foreign markets and none of their customers have reported any major problems.
To further ease the growing tensions, Washington might consider openly renouncing its informal ban for private companies, though it could still restrict buying for more sensitive government networks. Such a move would demonstrate that high-tech products made by private companies aren’t the source of national security challenges, moving the issue back to the political realm where it belongs.
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