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October 11, 2012

Congressional Warning on Chinese Telecoms Could Prompt Retaliation

by William Gallo

Analysts say this week's U.S. congressional report that called two Chinese telecoms a threat to national security is likely to prompt China to retaliate against U.S. businesses.

The House Intelligence Committee report warned U.S. companies against doing business with China's largest phone equipment companies, Huawei and ZTE.

Released Monday, the bipartisan report said the telecom giants could use their equipment to spy on the U.S., citing what it described as "a close relationship" with China's Communist Party.

Retaliation

So far, Beijing has only issued stern complaints about the report in official press briefings and state media editorials. But analysts say more moves are likely to come.

"I think it would be surprising if there wasn't retaliation," says Stan Abrams, a Beijing-based corporate IT lawyer. "It might not be tomorrow or next week, but at some point, something will happen and it will be to the detriment of U.S. companies."

Abrams, who is also a foreign investment law professor, told VOA that China's government has a reputation for responding in kind when a country makes a decision it views as antagonistic.

"China's foreign policy and its economic policy in terms of other countries is all about reciprocity. They're very much into a reciprocal type arrangement with other nations," Abrams said.

Consequences

Observers say the stakes are large, and could affect U.S. tech firms that the Commerce Department estimates sold $20 billion in advanced technology to China last year alone.

One U.S. business that could be affected is network equipment company Cisco, a competitor of Huawei that has relied on China for sales. The California-based company this week cut ties with ZTE, saying an internal investigation led it to believe the Chinese firm had re-sold Cisco equipment to Iran in violation of U.S. sanctions.

But Patrick Chovanec , a business professor at Tsinghua University, tells VOA it is tough to say how China would retaliate, given its already restrictive stance toward foreign investment.

"Perhaps they can tighten that up, and perhaps they may selectively retaliate in order to send a signal. But that's really just a continuation of policies that have already existed that prohibit foreign companies and American companies from competing on an even playing field in China," Chovanec said.

Others say that China could also respond indirectly by failing to make progress on other unrelated trade issues that have angered Washington, including currency valuation and intellectual property rights.

Trade war

But analysts do not expect a trade war between the U.S. and China, the world's two largest economies, since China relies on U.S. technology for its infrastructure and U.S. companies depend on Chinese components for their products.

Abrams says he thinks the issue will eventually die down, not least of all because China's Communist Party is busy working on putting the finishing touches on a sensitive once-a-decade leadership transition.

"I don't think China will complain about it for very much longer," he says."China right now has much bigger fish to fry and much bigger domestic concerns."