The conflict between the United States and China over trade and technology is expanding.
The arrest of a top executive at Chinese tech giant Huawei at the request of the US government has angered Beijing, alarmed investors and raised new doubts about the fragile truce that the leaders of the world’s top two economies reached just days ago.
“You have to see this as a significant escalation in the trade war,” said Christopher Balding, a China expert at the Fulbright University Vietnam in Ho Chi Minh City.
Viewed by US intelligence agencies as a national security threat, Huawei is one of China’s most prominent tech companies. It sells more smartphones than Apple (AAPL) and builds telecommunications networks in countries around the world.
Canadian authorities said late Wednesday that Huawei’s chief financial officer, Meng Wanzhou, had been arrested in Vancouver and that the United States is seeking her extradition.
The US and Canadian governments haven’t specified what charges Meng faces, but her arrest follows reports this year that the US Justice Department was investigating whether Huawei violated American sanctions on Iran.
“Under the Obama administration, the US indicted Chinese personnel on similar charges, but was reluctant to take more drastic action such as arresting the individuals in third countries, over fear that Beijing would retaliate against US interests in China or in other countries,” Eurasia Group political risk analysts wrote in a note.
Meng’s arrest “suggests that the gloves are now fully off in this arena,” the analysts said.
What does it mean for the trade war?
The arrest comes as the US and Chinese governments are discussing ways to tackle problems that led to their trade conflict, which has resulted in new tariffs on hundreds of billions of dollars of goods.
“This type of action will affect the atmosphere around the negotiations — making them less likely to bring a sustainable settlement,” the Eurasia Group analysts said.
China’s Commerce Ministry said Thursday it was confident a trade agreement with the United States could still be reached in time to hit a 90-day deadline set by President Donald Trump.
But the Chinese government is clearly angry about Meng’s arrest. The Foreign Ministry called on the United States and Canada to “immediately correct the wrongdoing” and restore her “personal freedom.”
The big question is what Beijing and Washington do now. Analysts suggest China could retaliate, and the Trump administration may be preparing other moves against Chinese interests.
The stakes are extremely high.
“This case is like a sharp tug on a loose thread that could be part of an unraveling of the relationship,” said Scott Kennedy, an expert on the Chinese economy at the Center for Strategic & International Studies in Washington. “Both sides need to proceed with abundant caution and a clear sense of their long term interests.”
Technology is at the heart of the trade war. The Trump administration says the huge waves of tariffs it has slapped on Chinese goods are part of an effort to stop China from getting its hands on American technology unfairly through practices like cybertheft and forcing companies to hand over trade secrets.
The return to the negotiating table follows a ceasefire reached at a dinner between Trump and his Chinese counterpart, Xi Jinping, on Saturday.
Balding pointed out that the deal was reached the same day that Meng was arrested in Canada.
“That is very politically embarrassing to Xi,” he said. “It has to be considered an escalation.”
What does it mean for Huawei?
The arrest is one of the strongest moves yet against Huawei by US authorities.
The company is largely shut out of supplying telecommunications equipment to US carriers. American officials have repeatedly alleged that the Chinese government could use Huawei products for espionage — claims the company denies.
Meng’s case “could be a prelude to further action against the firm and its senior officials,” Eurasia Group analysts said.
Huawei’s smaller rival, ZTE (ZTCOF), provides an example of how the US government could go further. The Chinese company was crippled for months after the US Commerce Department blocked it from buying vital parts from American companies.
The ban threatened to put ZTE out of business and highlighted China’s continued reliance on American technology, a vulnerability Beijing is eager to reduce. ZTE eventually got a reprieve after Xi personally asked Trump for help. But the crisis caused disruption for telecommunications carriers ZTE supplies around the world.
A similar ban on Huawei would have a bigger impact because its equipment is more widely used.
Huawei said in a statement about Meng’s arrest that it “has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng.”
“Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, US and EU,” it added.
The next moves in Meng’s case are key.
“There is a lot of legal and diplomatic wrangling ahead,” Balding said. “The US and Canada would not have taken this move lightly and it puts everything in a brand new light.”