With Its Mugging of Huawei, the Trump Administration Is Playing with Perilous Fire

As is well-known now, American authorities asked Canadian officials to arrest Huawei CFO Meng Wanzhou last week. The Canadians complied, and that on its own should have readers a bit terrified. Financial commentator Zachary Karabell observed that the arrest was “somewhat like the Chinese arresting the daughter of Steve Jobs if she had helped run Apple.”

So while officials in the Trump administration claim President Trump was unaware of the pending arrest when he had dinner recently with Chinese President Xi Jinping, let’s be serious. Of course Trump knew, or was soon to know. He would have had to know simply because the arrest itself was so outlandish, and so outside any reasonable norms.

And since the arrest was more than outre, it’s useful to state emphatically that Trump and the Administration he leads is playing with serious fire. Markets reflect this previous truth. Protectionism on its own is boneheaded, and runs counter to the interests of American workers and companies alike. Protectionism combined with the arrest of prominent business leaders in other countries is truly dangerous. Channeling Karabell, imagine the arrest of a prominent U.S. business personage in China (think Apple’s Tim Cook, as an example), particularly given the present occupant of the White House. The Trump administration has crossed a serious line, and yes, the Trump administration should be blamed here. Something like this would never have happened without approval from the highest of the high.  

Almost as bad as what the Trump administration plainly called for has been the reaction among Republicans who should know better. Normally reliable Nebraska Senator Ben Sasse told the New York Times that “Americans are grateful that our Canadian partners have arrested the chief financial officer of a giant Chinese telecom company for breaking U.S. sanctions against Iran.” So up in arms was Florida Senator Marco Rubio that he promised legislation meant to ban Chinese telecom companies in the U.S. More on Rubio’s desire to vandalize basic economics in a minute.

For now, it’s more than worthwhile to focus on Huawei’s alleged flouting of American law through its sale of telecom equipment (equipment that includes American-made components) to countries including Cuba, Iran, Sudan and Syria. This is what has some in the U.S. political class riled up, and it’s a loud reminder of just how microscopic is that same class’s understanding of economics.

To put is as plainly as possible, U.S. companies trade all the time with “Cuba, Iran, Sudan and Syria.” They just do so through intermediaries. To understand this simple truth, we need only return to the 1970s and the toothless Arab oil embargo “imposed” on the United States. History books tell us that Arab countries stopped selling us oil, but they did no such thing. “Arab oil” continued to flow into the United States; albeit via producers in countries not embargoed.

The above is how so-called U.S. trade controls should be understood. They’re utterly meaningless. So long as American companies are productive, and so long as there is demand from inside countries known to be enemies of the U.S., then U.S. companies will be trading with the enemy. They may not be breaking the law “directly,” but production itself is a signal of trade with everyone simply because there’s no accounting for the final destination of any good. In sports terms, while the San Antonio Spurs made a point to not trade all-world forward Kawhi Leonard to a Western Conference foe, they ultimately can’t block the Toronto Raptors from trading Leonard to one of their Western Conference rivals.

Looked at through the prism of Huawei, it’s presently the world’s #2 maker of smartphones, and is the global leader when it comes to telecom equipment. What this tells us is that persecution of the corporation for sales to enemies of the U.S. is for federal officials to make a distinction without a difference. Short of Huawei hoarding all of its production, its smartphones and telecom equipment will ultimately reach Iran et al for the prosaic reason that Huawei sells so much in the way of smartphones and telecom equipment. It can’t be repeated enough that there’s no accounting for the final destination of any good.  Translating what is completely mindless, the federal government is ultimately persecuting Huawei for being successful. 

Which brings us back to Rubio’s proposed legislation. On its own Washington’s blockage of Huawei is notable when we remember how U.S./China trade is framed stateside. Supposedly they block all of our companies from selling there, while we’re fully open to them. Not so with Huawei. One doesn’t find its phones at AT&T stores not because they’re not high quality, but because they’re illegal. The why behind the latter is really and truly suspect.

Huawei, a wildly highly successful telecom company can’t place its goods on U.S. shelves because it is viewed as a national security threat. The laughable argument offered up by members of the political class to defend the indefensible is that Huawei’s close ties to the Chinese government mean that American use of its phones and equipment imperil us because we could be spied upon. Oh dear….

The real threat here is U.S. telecoms that are close enough to our federal government such that they can convince federal officials to pursue always damaging protectionism. Luckily for U.S. smartphone makers (Apple sells 20% of its iPhones in China), the rules against our best and brightest in China aren’t so stringent.

But the main thing is that national security types are wrapping themselves in a false argument that the Chinese will spy on us through our phones. Ok, but what will they do? As President Trump’s endless Tweets about China remind us, we’re a huge market for Chinese companies. So, we’re supposed to believe the Chinese government will spy on us in order to war against the biggest market for companies close to that same Chinese government?

The whole Huawei story is a ridiculous one. And a protectionist one. And one rooted in flamboyant confusion about economics within the U.S. political class. But the worst thing about this story is how dangerous it is. When protectionism leads to arrests, it’s not unreasonable to assume that shooting could be next.

The above in mind, we’ve heard since Trump entered the White House that he’s surrounded himself with people who understand diplomacy and the importance of trade to world peace. It’s time for those people to stand up in the Administration, and to show a willingness to depart same unless sanity prevails. Because make no mistake about it, the arrest of Meng Wanzhou was truly insane.