Diatribes of Jay: Why the Huawei Indictment is a Big, Big Deal

[For how Speaker Pelosi has become a new sheriff in town, click here. For how Trump’s misrule could kill your kids, click here. For comment on MLK Day 2019 and the structural legacies of slavery, click here. For reasons why the partial government shutdown helps Dems the longer it lasts, click here. For a discussion of how our national openness hurts us and what we really need from China, click here. For a brief explanation of how badly both Trump and his opposition are failing at “the art of the deal,” click here. For a deep dive into how Apple tries to thwart Google’s capture of the web-browser market, click here. For a review of Speaker Pelosi’s superb qualifications to lead the Democratic Party, click here. For reasons why natural-gas and electric cars are essential to national security, click here. For additional reasons, click here. For the source of Facebook’s discontents and how to save democracy from it, click here. For Democrats’ core values, click here. The Last Adult is Leaving the White House. Who will Shut Off the Lights? For how our two parties lost their souls, click here. For the dire portent of Putin’s high-fiving the Saudi Crown Prince, click here. For updated advice on how to drive on the Sun’s power alone, or without fossil fuels, click here. For a 2018 Thanksgiving Message, click here. For a list of links to recent posts in reverse chronological order, click here.]

Imagine Elon Musk being detained in China on criminal charges while visiting his Tesla factory there. Industrialists and entrepreneurs are not celebrities in China, as most everybody important (including our current president) is here. But the cultural and shock impact of Musk’s hypothetical arrest in China would be roughly similar to the impact on China’s cognoscenti of the arrest in Canada, at the US’ request, of Meng Wanzhou.

Meng is the CFO of Huawei, the Chinese telecommunications giant that is challenging US firms like Cisco, Qualcomm and Broadcom (now owned by Avago) for dominance of the nascent, global 5G cellphone-telecomm market. She is also the daughter of Ren Fengshei, Huawei’s founder, who’s a former People’s Liberation Army officer and a suspected Chinese intelligence operative. Yesterday, our Justice Department unsealed indictments of Meng and Huawei for stealing trade secrets, obstructing a criminal investigation and evading economic sanctions on Iran. A redacted part of the indictment may also have named Ren.

Why is this all such a big deal? The answer is simple. For now and for the foreseeable future, China and the United States are and will be the top national dogs on this planet. China has four times as many people but still lags a bit in economic, political and military power. But the two are roughly equivalent powers seeking global influence, if not hegemony, in industry, commerce, politics and culture.

So for the foreseeable future, the two nations will be locked in a struggle for supremacy. The big question is whether that struggle will be governed by rules, or whether it will be a free-for-all with hostage taking, prisoner exchanges, rampant dirty tricks, and—in the worst case—assassinations or open war.

Every sentient being on this planet has a stake in whether there will be rules and what kind of rules they will be. Will it be a “game” with “civilized” rules forged by durable agreement? Or will it be a dog-eat-dog struggle in which every individual participant’s life, fortune and family are ever at risk?

Will we repeat the Middle Ages, with their hostages, dungeons, torture and betrayals, but with more modern, vastly more effective technology of destruction, albeit also with cleaner toilets and better medicine to keep victims alive during torture? Or will we somehow manage to make rules for this vital and maybe deadly competition, so that individuals involved can live in relative peace and tranquility and “enjoy” the struggle as a civilized “game”? That’s what’s at stake in the Huawei case.

To highlight the importance of the choice, consider two true stories from history. In his famous treatise The Prince, Niccolò Machiavelli describes two instances in which an entire delegation of peace negotiators was slaughtered, to the man, under a premeditated plan of the other side in the “peace” talks.

The second story tells how the Mongols stopped this sort of thing. When the denizens of a fortified city killed the Mongol’s emissaries in acts of defiance, the Mongols used their fast horses and special tactics to draw out and slaughter the city’s defenders. Then they captured the city, slaughtered every single human being in it, and let it be known that any other city that killed their emissaries would suffer the same fate.

This is the gruesome origin of our current universal human custom of diplomatic immunity. It just took some time for the custom to travel from South Asia to Europe and thence to the US.

One hopes that it will not take this sort of slaughter—let alone with nuclear weapons—to reach some sort of useful consensus on rules among competing centers of power in the twenty-first century. Presumably our species has learned to predict better the likely consequences of different rules (or the lack thereof) on human behavior and to adhere to rules that shed less blood, for the mutual benefit of all concerned.

It’s worthwhile noting that China and the US each has its own internal rules. They agree roughly in trying to avoid mass slaughter. The problem is they don’t coincide in important detail.

Like the US, China doesn’t execute many people, including internal political dissidents. Bo Xilai, a brilliant demagogue who could have become China’s Donald Trump, sits safely in jail, but alive. The vast majority of “unruly” ethic dissidents, including Xingjiang’s Muslim Uighurs and the few remaining recalcitrant ethnic Tibetans, languish in prison; Beijing has reserved the death penalty for actual perpetrators of terrorism or murder. Just so, the United States is close to outlawing the death penalty (as already has Europe) for all but murder and terrorism. The West, at least, no longer hangs people for theft or robbery, as it did in Dickensian England.

So each power has its own rules, which have become somewhat more “civilized” since Machiavelli’s time. Problems arise when there are few or no enforceable rules for a situation that encompasses rival powers or their interests. In the South China Sea, for example, China cites its own “historical” claims, which the United Nations and major treaty bodies do not recognize. So China’s claims reduce to “might makes right,” a notion that precipitated our species’ most terrible war.

The Huawei case lies between these two extremes. The Chinese interests—China’s own scientific and technological development and its global economic expansion—are legitimate interests of any national power. Yet the means alleged in the indictment are legitimate subjects of US law: (1) theft of trade secrets from US companies inside the US; (2) interference with criminal investigations inside the US; and (3) working with US financial institutions inside the US to violate US and international sanctions on Iran.

The italicized phrases give the US unquestionable legal jurisdiction, in accordance with the universal principle of territoriality. But eliminate the phrases and the substance behind them and US jurisdiction becomes questionable, begging the question of what rules apply internationally and globally.

The intellectual property (IP) question is particularly fraught. Apart from software, to which copyright also applies, most industrial technology relies on one of two forms of IP protection: patents or trade secrets. The two forms of protection are mutually exclusive: patented technology cannot be protected as a trade secret, because a patent must disclose the technology it protects so that anyone of ordinary skill in the field can practice the technology merely by reading the patent after it expires. In contrast, trade secrets can last as long as secrecy does; they have no fixed expiration date.

Many US industrialists do not trust China’s patent system and so rely primarily on trade-secret protection of their technology, preferably inside the US. There is some real basis for this distrust. But at the end of the day, the effectiveness of China’s patent system is an open book. US firms can evaluate it by keeping statistics on how effective suits by US patent owners have been compared to those by Chinese and other foreign patent owners. One of the most important functions of our own government is keeping accurate tabs on this sort of thing.

Since China joined the WTO and international patent conventions, the effectiveness of China’s patent system has seen steady improvement. That sort of improvement has been a feature of technologically developing nations in general: domestic innovators begin to demand effective patent protection as real innovation becomes a more important feature of domestic technology. We have observed this phenomenon in practice in places like Japan, South Korea and Taiwan as their industries developed. In any event, failures of a domestic patent system are subject to diplomatic complaint and legal processes under various international agreements respecting patents.

Trade secrets are another story. Once a trade secret is out in public, it ceases to exist. If Company A steals a trade secret from Company B but keeps it secret, too, it becomes, de facto, the trade secret of both, insofar as concerns liability of third parties for its theft. Yet it’s very hard for Company B to recover its loss in terms of damages, for damages are hard to calculate or speculative, let alone for the loss of exclusive use. That’s one reason why the US is resorting to criminal prosecution in the Huawei case: to fire a shot across the bow of a gem of Chinese industry that is believed to use trade-secret theft as a standard tool of competition, and that is believed to be under the control of, or in cahoots with, the Chinese government.

The convictions of individuals like Meng and possibly Ren are matters of proof. What did they know and when did they know it? But China may view these indictments as unfair attempts to use important individuals as pawns or bargaining chips, just as we might if China captured Elon Musk. And if Huawei actually did steal a US secret in the US, but has sent it to China already, any US territorial remedy would be ineffective to secure a practical remedy because Huawei’s business is global.

So at least as concerns trade secrets—a form of protection that many advanced global businesses rely on when they lack trust in the global patent system—a viable system of protection still awaits good international rules with good enforcement mechanisms.

Similar considerations apply to the other two prongs of the released Huawei indictment. An attempt to protect US criminal process from inference by foreigners won’t work if the foreigners’ governments treat the criminal defendants as hostages taken by the US and so take hostages of their own in retaliation. Nor will enforcement of US or international economic sanctions work (on Iran or any other country) if the country (in this case China) alleged to be breaking them by violating another country’s domestic criminal law can simply circumvent the sanctions elsewhere, outside the country of prosecution (in this case the US). (We leave aside, in this essay, the additional issue of national security and possible “back doors” to the entire US telecommunications infrastructure, which yesterday’s indictment didn’t directly address.)

What US business needs to level the playing field is a better, more effective global regime of rules. That’s a matter of diplomacy, not criminal prosecution.

Even under Tillerson as Secretary of State, that sort of diplomacy was woefully inadequate, in part because he was glacially slow in filling the hundreds of State-Department positions from which non-political experts do this sort of work. Beset with crisis after crisis, including gratuitous trade wars and presidential gaffes, Secretary Pompeo also has not filled those positions or given priority to this work.

The American business community, which depends for global influence on his doing so, ought be clamoring for Pompeo to get this work done, and for our Narcissist in Chief to be impeached and removed so that this work can receive the priority that its importance deserves. This is just one of many ways in which a president who negotiates by chaos, doesn’t read his briefing papers, and seeks only ego-feeding, big showpieces is slowly, inexorably destroying the commercial international order and opening us all to unfathomable future risk.

Footnote 1: For the basic facts of the indictment, Huawei, Meng and Ren, see New York Times (Tue., Jan. 19. 2019) at A1.

Footnote 2: Patent applicants sometimes play games by hiding so-called “auxiliary” technology, i.e., not disclosing it in the patent. That technology might involve secret means for making a part or assembling a whole machine, or for optimizing a process. The natural response of sophisticated tribunals to these ploys is to restrict the patent’s coverage to the technology actually disclosed, or sometimes to invalidate a patent as violating the requirement that it disclose the best mode of practicing the invention.

Footnote 3: A comment to the Uniform [among US states] Trade Secrets Act gives only the co-owner suffering theft or misappropriation, and not the other co-owner, the right to sue for it. This rules keeps litigation involving third-party thieves separate from that involving the theft that created the co-ownership.

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Diatribes of Jay

29 January 2019

Why the Huawei Indictment is a Big, Big Deal

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