Arrest of Top Huawei Executive Could Roil Trade Talks with China

American officials are set to indict the chief financial officer of Chinese telecom giant Huawei, Meng Wanzhou, on charges of violating U.S. sanctions on Iran.

Canadian authorities arrested Meng at the request of the U.S. prosecutors while she transited at Vancouver airport on Dec. 1.

The ordeal represents the latest flashpoint between China and the United States and comes amid a protracted trade war that has unsettled the global economy. Fears that her arrest would undermine talks between the United States and China to end the trade war have already roiled markets around the world.

The case against Meng touches on some of the most sensitive aspects of the relationship between the two countries.

Huawei, a cornerstone of China’s economic development plans, is already viewed with deep suspicion in the West. Any evidence that Huawei violated U.S. sanctions on Iran, either directly or tangentially, would further damage the company’s reputation in the United States.

Some analysts, meanwhile, believe China might retaliate with measures against Western business executives.

Here is what we know about the case.

Why does the West view Huawei as a threat?

Chinese President Xi Jinping is trying to turn his country from a destination for low-cost manufacturing to a high-tech powerhouse. It isn’t enough for Xi that Western technology companies use Chinese factories to make their goods. He wants Chinese firms to be designing the key components of the world’s digital infrastructure—and pocketing the profits that come with controlling the global technology market.

Huawei is key to that plan. The manufacturer of a wide variety of telecommunications products, Huawei is quickly becoming a rival to more established Western firms that make smartphones, routers, and cell phone towers—products that will dominate the world’s telecommunications infrastructure in the years to come.

But Western intelligence officials fear that Huawei’s infrastructure projects would give the Chinese government a way to spy on people around the globe.

“Cell phone networks are deliberately insecure in order to enable wiretapping,” said Nick Weaver, a staff researcher at the International Computer Science Institute. “Using Chinese-built infrastructure is just asking to say, ‘Let Chinese intelligence conduct wiretaps,’ since the infrastructure itself is designed to support such meddling.”

Telecom companies around the world are currently racing to develop the technology and establish the standards for what has been dubbed 5G. This next-generation network will provide greater internet speeds and open the door to new technologies—like self-driving cars—that require the transmission of huge amounts of data for their operation.

The United States has mostly banned government agencies and contractors that work with the government from using Huawei products, and U.S. allies appear to be doing the same. Earlier this year, Australia banned Huawei products from its next-generation wireless network. New Zealand quickly followed suit.

The United Kingdom and Canada could be next, though Huawei has lobbied hard to enter their markets. Just this week, Huawei said it would invest $2 billion in the U.K. economy in an effort to alleviate security concerns about its products.

Did Huawei violate Iran sanctions?

On Friday, Canadian prosecutors alleged that Meng committed fraud by misrepresenting the relationship between Huawei and a Hong Kong subsidiary, Skycom Tech, in order to facilitate transactions with Iran that were banned by U.S. sanctions.

These allegations first came to light in 2013, when Reuters documented the relationship between Huawei and Skycom and their attempt to sell banned Hewlett-Packard telecommunications gear to Iran worth 1.3 million euros, about $1.7 million at the time.

Experts who study U.S. sanctions on Iran say Huawei has a history of attempting to circumvent such measures.  

“The U.S. was reportedly investigating Huawei’s activities for the past two years, and there has been public reporting for the better part of a decade on Huawei’s dealings with sanctioned Iranian entities and its sales of repression-enabling technology to the regime,” said Behnam Ben Taleblu, a research fellow at the Foundation for Defense of Democracies, a hawkish Washington think tank.

What do we know about the specific reasons for the arrest?

According to Canadian prosecutors, the charges against Meng center on misrepresentations she made to U.S. banks about the relationship between Huawei and Skycom.

When American banks questioned Meng about the relationship—following revelations of Skycom’s involvement in selling HP gear to Tehran—she allegedly assured the banks that the two were separate companies. But U.S. officials believe that’s not the case.

Meng arrest appears to stem from a long-running investigation being handled by American prosecutors in New York, and it is unusual insofar as it is targeting the senior executive of a highly prominent Chinese company.

The decision to pursue a criminal case against her represents a major escalation by U.S. prosecutors. When the Justice Department pursued the Chinese technology firm ZTE on charges that it had violated sanctions on Iran, it did so by prosecuting the company itself. The result was a major financial penalty against ZTE.

The company was banned from using American components as a result and nearly shut its doors before U.S. President Donald Trump personally intervened at the request of Xi to keep it afloat.

In the case of Huawei, the decision to arrest a top executive “suggests they have unusually strong evidence tying her personally to the case,” according to Julian Ku, a law professor at Hofstra University who studies China.

How does China see this move?

Chinese officials have reacted furiously to Meng’s arrest and have called for her release. China’s embassy in Ottawa said it would “take all measures to resolutely protect the legitimate rights and interests of Chinese citizens.”

Ku said China is likely to believe the case is politically motivated. “The Chinese government is not going to see this as a legal case,” he said. “They’re going to see this as Trump abusing poor Chinese executives.”

The prosecution could hamper talks on a broader trade agreement between the two countries. Trump and Xi agreed at the G-20 summit in Argentina earlier this month to put additional tariffs on hold for 90 days while negotiators try to strike a deal.

In an unrelated case, theWall Street Journal reported on Friday that American prosecutors are set to unseal an indictment targeting a long-running Chinese hacking campaign against U.S. firms.

What’s China’s likely response?

One possibility is that Beijing would bring similar legal cases against Western executives working in China. The range of such potential cases is broad. Chinese law, for example, prohibits arms deals with Taiwan, so Chinese authorities could conceivably go after Western executives working with Taipei.