Trump Slamming the Door on Chinese Tech Invaders

Tariffs get the headlines in Donald Trump's war with China. An increasingly vigorous campaign by his administration to block Chinese acquisition of American companies, to ban the sale of certain of their products into the U.S., and to combat espionage and outright theft of trade secrets should get greater notice. At issue is the perceived threat to national security.

Two-or-so decades back, China decided it was entitled to become a world power. It would count the West's naïve belief that countries act ethically and live up to agreements. When the U.S. complained of counterfeited goods, pirated software and films, and outright theft of technology, China would assure Washington of crackdowns and make token efforts, but only to distract U.S. attention while the thievery went on. Agreements were made to be broken. An accord signed by President Obama and Chinese President Xi Jinping three years ago offers example. Both pledged that neither country would thenceforward engage in economic espionage. How did that turn out? This November the National Security Agency announced that Chinese hacking of U.S. companies to steal proprietary technology has gone "well beyond the bounds of the agreement".

The U.S. had paid little heed to what was coming. A 2011 report to Congress two years in the making by America's intelligence agencies warned of cyber spying against U.S. companies, bluntly stating that "Chinese actors are the world's most active and persistent perpetrators of economic espionage". Richard Clarke, cybersecurity adviser to George W. Bush, stated at the time that "the Obama administration has not ever attempted to develop a proposal for spotting and stopping vast industrial espionage". Why? Because it feared a negative reaction from privacy rights and Internet freedom advocates, Clarke said. In 2012, Obama and Biden "warned" (the quotes are meant as ridicule) Xi Jinping that they "had been hearing more and more from U.S. businesses about intellectual property and trade secret theft". Yet they stood by and watched it happen, doing little more than politely asking China to stop.

Nor was anything done to stop American companies from knuckling under to the Chinese demand that they enter into joint ventures with Chinese partners and share their technology as the ticket of entry into the Chinese market.

To his credit this president came to office with no such delusions about China. "We have the greatest technology in the world", Trump said in July. "People come and steal it". Largely through his Commerce Department and the Committee on Foreign Investment in the United States (CFIUS) we have seen his administration step up action.

There was one notable exception. Trump's Commerce Department had banned the export of U.S. electronic components to ZTE Corp., the world's No. 4 maker of telecommunications equipment, for violating U.S. sanctions by selling to North Korea and Iran. ZTE is viewed as a security threat and use of its equipment by U.S. companies is effectively banned. But this spring the president, protecting what he touted as "tremendous progress" in his relationship with Xi Jinping after their April meeting at Trump's Mar-a-Lago Club in Palm Beach, overrode the ban when he learned that ZTE, which relies on American microchips for its smartphones and other products, would be crippled once supplies ran out.

Both sides of the aisle in Congress were irate that the president was rescuing a company that had broken their sanction law. ZTE had been a bad actor in other ways, with several of its officials convicted for bribery to win contracts. The matter was resolved allowing exports to resume on condition of a $1.3 billion fine, replacement of ZTE's board and senior management, and installation of compliance officers on site reporting to Washington.

U.S. companies are in a race with China to develop the next generation of wireless technology called 5G. As much as a hundred times faster than its predecessor, the 4G standard, and capable of handling huge amounts of data, it will pave the way for driverless autos, mobile video and the ever-expanding uses of the Internet such as doctors manipulating devices to perform surgeries half the world away.

So when Singapore's Broadcom Ltd. launched a $117 billion takeover bid of U.S.-based Qualcomm Inc., this country's major player in the 5G development battle, Qualcomm unusually asked for a review by CFIUS, which looks at proposed deals for their security implications. It amounted to Qualcomm asking that the takeover be blocked. That was one free market transaction that was not going to happen. The Trump administration intervened, not wanting to lose to a foreign buyer what is so far this country's strongest competitor against Huawei Technologies, China's telecommunications and electronics giant with thousands of engineers working to win the 5G sweepstakes. If Huawei, backed by the Chinese government, wins against American companies — which our government mindlessly leaves on their own to compete — it could be in a position to dictate the 5G standards and drive competitors from the field.

If the government doesn't help Qualcomm, it at least has high on its list the campaign against Huawei. It's the world's No. 1 maker of telecommunications equipment that wireless carriers use in cell towers. America's big telecom companies don't use Huawei equipment, deterred by a 2012 congressional report that raised the alarm of how the Chinese government could force Huawei to do its bidding. At the time a former member of the military's Joint Chiefs said, "We'd be crazy to let Huawei on our networks, just crazy".

The concern was that the Chinese government could be ordering Huawei (its founder was a former engineer with China's People's Liberation Army) to insert code capable of disabling cell towers or launching cyberattacks. Complex software installed in a tower's base transmits calls and data and is frequently updated remotely by Huawei. The wireless carrier is blind to what changes and when. A "back door" implant would go undetected.

In the latest move, the U.S. has even asked foreign allies to avoid further use of Huawei equipment, warning them of cybersecurity risks. The U.S. worries about countries that host our military bases, such as Germany, Italy and Japan, where the military is a heavy user of commercial services outside its own satellites and telecom network that could be exploited by Huawei.

CFIUS (explained momentarily) has been busy. Last year it blocked a Chinese company resident in the U.S. from acquiring Lattice Semiconductor. It was after Lattice's gate array technology that goes into chips used in missile guidance systems and radar, perhaps the same chips that two Chinese nationals were caught smuggling by the FBI in 2012.

CFIUS blocked a Chinese truck company from buying a Colorado company developing motors for electric cars. It stopped the sale to a Chinese company of a Massachusetts producer of testing equipment for semiconductors and electronics. The attempt by a Chinese government-backed investment group to buy an American semiconductor maker was rebuffed. CFIUS even closed the barn door to keep out a technology company that wanted to buy a Nebraska outfit that sells pigs for breeding.

As seen, roadblocks halting Chinese investments in the U.S. are not limited to tech companies. Chinese conglomerate HNA was stymied from acquiring investment firm Skybridge Capital, founded by momentary White House communications chief, Anthony Scaramucci. Also stymied was the acquisition of online payment transfer company Moneygram by Ant Financial, the electronic payment company controlled by Jack Ma, the founder of Alibaba, the huge Chinese equivalent of Amazon.

In July, China Mobile, the world's largest carrier, was ruled by the Trump administration as a threat to national security. In October, the Justice Department arrested a Chinese intelligence officer who is charged with stealing information from GE Aviation, one of the largest manufacturer of jet engines. The government recently announced that it would sharply reduce export of civilian nuclear technology to China. Experts divined that the technology was being diverted to power new generations of Chinese submarines, aircraft carriers, and floating nuclear power plants. China can never be trusted. An FBI survey in 2015 found that its caseload of economic espionage cases had increased by 56% from the year before and that 95% pointed to China.

As police raided the offices of a Taiwan chip maker, engineers bribed by mainland China's Jinhua Integrated Circuit Company handed USB drives, laptops and documents to an unsuspected lower-level female employee who simply walked them out the door on their way to China. They contained microchip designs from Idaho's memory chip maker Micron Technology that China's state-owned Fujian Jinhua wanted for its new $5.7 billion microchip factory, now that China is trying to build its own semiconductor industry so as not to be reliant on the U.S. In July of 2015, Tsinghua Unigroup, a state-owned company that is China's largest chip maker, had tried to buy Micron in what, at $23 billion, would have been the biggest Chinese acquisition of an American company had it not been blocked for national security reasons. So China did what China often does: it stole Micron's work.

As with ZTE, but this time with no reversal now that relations between the U.S. and China have worsened, the Commerce Department in October banned sales of American semiconductors to Jinhua Integrated in a move that could cripple the company. Micron has sued Jinhua in California accusing it of the theft. Jinhua counter-sued in a Chinese court and won a temporary order blocking the sale of Micron products in China.

Trump's principle weapon against Chinese incursion is CFIUS. It is not new. Formed from representatives of the Defense, State, Commerce, Homeland Security and a dozen other departments and agencies, it was established in 1975 by an executive order from President Ford.

The Committee has been toughened by a bill signed into law this August, the culmination of a two-year campaign by John Cornyn, Republican senator from Texas, and Representative Robert Pittenger, Republican from North Carolina. They were concerned about Chinese money pouring into the country, often exploiting loopholes to evade review by the Committee so as to acquire U.S. technology, including technology with military applications. The law gives the Committee the broadened ability to examine positions taken by foreign entities in venture capital funds, transactions that use shell companies, and any deal structured to dodge the Committee's review. The measure made it into law with prominent Democratic support and miraculously despite the strong objections of companies such as IBM and General Electric. (And yet such companies did succeed in weakening the bill to curtail CFIUS review of U.S. companies making deals abroad no matter what such deals might mean for national security. )

The administration has embraced the legislation, spurred by Trump's determination to thwart China. With the intent to apply it broadly, it plans to review any foreign transaction involving a business that designs or produces technology in 27 categories such as telecommunications, computers, and semiconductors.

Cyber espionage, forced technology transfer, outright theft, hardware implants — China has attacked the United States from every angle so adroitly that one is left to wonder whether there is anything left to steal.