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How China Obtains American Trade Secrets

BEIJING — The new trade deal between Washington and Beijing is intended in part to address one of the most acrimonious issues between them: China’s tactics in acquiring technology from companies based in the West.

It’s a thorny topic, and one that is unlikely to be fully solved with a trade pact.

The Trump administration blames China for stealing Western trade secrets, and it used those allegations as the legal basis for launching the trade war nearly two years ago. Trade talks between the two sides quickly became about broader issues, but the partial trade pact set to be signed on Wednesday includes pledges by China to stop some of the practices that Western businesses have long criticized. Depending on the details, that could make the deal more palatable for American businesses.

Underpinning these concerns is that China has repeatedly shown that it can acquire technology and, through heavy government subsidies, build competitive rivals to American companies. Businesses worry that it could do the same in other industries, like software and chips.

China has long denied that it forces foreign companies to give up technology. They do it willingly, Beijing asserts, to get access to China’s vast and growing market. Still, Chinese officials say they are taking steps to address the concerns.

The American authorities have long accused Chinese companies and individuals of hacking and other outright theft of American corporate secrets. And some in the Trump administration worry that Chinese companies are simply buying it through corporate deals.

American companies say Chinese companies also use more subtle tactics to get access to valuable technology.

Sometimes China requires foreign companies to form joint ventures with local firms in order to do business there, as in the case of the auto industry. It also sometimes requires that a certain percentage of a product’s value be manufactured locally, as it once did with wind turbines and solar panels.

The technology companies Apple and Amazon set up ventures with local partners to handle data in China to comply with internal security laws.

Companies are loath to accuse Chinese partners of theft for fear of getting punished. Business groups that represent them say Chinese companies use those corporate ties to pressure foreign partners into giving up secrets. They also say Chinese officials have pressured foreign companies to give them access to sensitive technology as part of a review process to make sure those products are safe for Chinese consumers.

Foreign business groups point to renewable energy as one area where China used some of these tactics to build homegrown industries.

Gamesa of Spain was the wind turbine market leader in China when Beijing mandated in 2005 that 70 percent of each wind turbine installed in China had to be manufactured inside the country. The company trained more than 500 suppliers in China to manufacture practically every part in its turbines. It set up a plant to assemble them in the city of Tianjin. Other multinational wind turbine manufacturers did the same.

The Obama administration questioned the policy as a violation of World Trade Organization rules and China withdrew it, but by then it was too late. Chinese state-controlled enterprises had begun to assemble turbines using the same suppliers. China is now the world’s biggest market for wind turbines, and they are mostly made by Chinese companies.

A somewhat similar industrial evolution occurred soon after in solar energy. China required that its first big municipal solar project only use solar panels that were at least 80 percent made in China. Companies rushed to produce in China and share technology.

The Chinese government also heavily subsidized the manufacture of solar panels, mostly for export. Chinese companies ended up producing most of the world’s solar panels.

Some in the Trump administration fear the same thing is happening in cars.

Shortly after opening China to foreign auto companies, Chinese officials held a competition among global automakers for who would be allowed to enter the market. The competition included a detailed review of each company’s offer to transfer technology to a joint venture to be formed with a Chinese state-owned partner.

General Motors beat out Ford Motor and Toyota by agreeing to build a state-of-the-art assembly plant in Shanghai with four dozen robots to make the latest Buicks. Executives at Volkswagen, the German automaker that had entered China even earlier, were furious, because competitive pressures forced them to upgrade their technology as well.

China is now the world’s largest car market. But except for a few luxury models, practically all of the cars sold in China are made there. Steep Chinese tariffs on imported cars and car parts have also played a role, as has the desire of foreign companies to avoid the costs and risks of transporting cars from distant production sites.

In the trade truce expected to be signed on Wednesday, Chinese officials have agreed not to force companies to transfer technology as a condition of doing business, and they undertook to punish firms that infringe on or steal trade secrets. China also agreed not to use Chinese companies to obtain sensitive technology through acquisitions.

Even before that, Chinese officials pledged to drop the joint venture requirement in areas like cars.

The question is whether China will stick to its pledges. Chinese officials have already issued rules echoing much of what they promised in Wednesday’s agreement. Foreign lawyers say the new rules have large loopholes. The rules give Chinese regulators broad discretion to act as they see fit in cases that involve “special circumstances,” “national state interests” and other fuzzy exceptions.

The trade pact calls for consultations within 90 days if the United States thinks Beijing is not living up to its commitments, but it is unclear whether the Trump administration could then force compliance. More broadly, the pact does not address China’s subsidies for new industries, a key factor in what happened in sectors like solar panels. China has largely rebuffed calls to rein in subsidies for homegrown competitors in industries like semiconductors, commercial aircraft, electric cars and other technologies of tomorrow.

The Trump administration is counting on tariffs to counterbalance that. The partial trade pact will leave in place broad tariffs on many of those industries to prevent Chinese competitors from flooding the American market. Leaving broad tariffs in place also gives Western companies a strong financial incentive to reconsider supply chains that are heavily reliant on China.

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Blocked in U.S., Huawei Touts ‘Shared Values’ to Compete in Europe

BRUSSELS — The committee room of the European Parliament was crowded with lawmakers and lobbyists who were facing off with executives of the telecommunications giant Huawei. One lawmaker, eager to raise the trust issue, got directly to the point: Could Huawei be a front for Chinese state espionage?

Abraham Liu, the company’s top official in Europe, pushed right back. Huawei, he said, is completely independent, with no obligation to spy for China, and to do so “would be like committing suicide.”

Then he added a twist — and a veiled swipe at Huawei’s loudest critic, the Trump administration: It is Huawei, not America, that shares European principles.

“Europe’s values of openness, innovation and the rule of law have led to it being a powerhouse in mobile communications — and Huawei shares these values,” Mr. Liu said.

In Washington, Huawei is treated like a grave security risk over concerns that Chinese intelligence agencies could use the company’s technology to infiltrate the systems of foreign customers. Yet in Brussels, the European Union’s de facto capital, the company is waging a multifaceted charm offensive, partly by exploiting European distrust toward the Trump administration — and, for now, it is working.

As the company competes to build Europe’s next-generation 5G wireless networks, Huawei is spending millions of dollars on an intensive advertising and lobbying campaign, while making a bold argument to European policymakers: That while the Trump administration is unpredictable and unreliable, Huawei is a guarantor of privacy, transparency and globalization.

The message hasn’t gone unnoticed, nor has the irony.

“The Chinese have started brazenly claiming that it is China, not the United States, that shares more values with Europe,” said Julianne Smith of the German Marshall Fund in Washington.

“Chinese scholars and officials also frequently remind European audiences that unlike the United States, China believes in climate change and multilateralism, a message that is especially powerful in a place like Germany,” she said.

To push its message, Huawei has made unexpected moves. One is the hearing, in October, in which Mr. Liu spoke about values. It was not a case of a corporate leader being hauled before lawmakers for a grilling. Instead, Huawei had organized the “public debate” with members of the European Parliament, live-streamed the proceeding and posted the video online.

In the United States, the Trump administration has essentially blocked Huawei, but Mr. Trump’s efforts to push European allies to ban Huawei have fallen flat.

Neither the European Union nor individual countries have moved to restrict the company’s access to their markets. Hungary, whose far-right prime minister, Viktor Orban, identifies himself as a Trump ally, announced in November that Huawei would lead its 5G infrastructure rollout.Even as government officials have debated its role, Huawei has forged ahead, and says it has already made dozens of deals to sell 5G hardware to wireless carriers across Europe. The extent of its involvement is unclear, because a single carrier can buy gear from multiple vendors, and some pieces of equipment are more security-sensitive than others.

And at a NATO gathering near London this month, when Mr. Trump pressed Prime Minister Boris Johnson to shut Huawei out of Britain, Mr. Johnson — who has postponed a decision on the question — was noncommittal.

Secretary of State Mike Pompeo, in an opinion piece published by Politico Europe, implored policymakers “not to give control of their critical infrastructure to Chinese tech giants.”

To a degree, European policymakers in charge of assessing risks to cybersecurity share the United States’ concerns about Huawei. A recent European Union report highlighted, without naming Huawei, that a non-European 5G technology provider could be forced to allow its government to hack into and even control its networks, enabling access to private data, trade secrets and national security operations.

In Germany, Chancellor Angela Merkel has said that Huawei should be allowed to compete for 5G contracts, but other politicians have pushed back, indicating that the company could be in for a fight there.

“No Chinese company is an independent company,” Norbert Röttgen, a former government minister from Ms. Merkel’s party, said recently, adding that Huawei’s involvement was “an imminent question of national security.”

Yet one German telecommunication company, Telefonica Deutschland, has announced that it intends to contract Huawei for its 5G development.

European Union rules make it difficult to target individual companies for political reasons. The bloc could impose stringent standards of conduct and openness for 5G contractors that could be used to restrict Huawei but, as yet, has simply let each member country to decide how to proceed.

Distrust toward the Trump administration is also a significant factor, as European policymakers worry that American sanctions on Huawei are simply a bargaining chip in the United States’ broader trade war with China and might be reversed.

“There is a fear that if you take what potentially are quite expensive decisions with regards to 5G because the Americans have told you that they are a security problem, and then President Trump gets a trade deal with China and suddenly Huawei is all O.K. again, then you’ll feel like the earth has moved under your feet,” said Ian Bond, director of foreign policy at the Center for European Reform, a policy group in London.

Years before the advent of 5G, Huawei was establishing a major presence in Europe, where it ranks third in mobile phone sales, behind Samsung and Apple. The company says it has 12,000 employees, and 23 research and development centers in Europe, a way of building favor and familiarity with policymakers.

And it has moved boldly to position itself in Brussels.

Huawei has spent more than $3 million this year on advertising and lobbying, according to its disclosures in the European Union lobbying registry. That is more than the combined spending of its European 5G competitors, Ericsson and Nokia, and far more than its American rival, Qualcomm.

In a huge advertising campaign this year, the company plastered banners featuring happy faces at Brussels Airport and in key spots around the city.

“Vote for 5G,” they read. “#Vote Smarter.”

In a press packet sent to hundreds of journalists there, Huawei argued that “It is crucial to roll out 5G the European way, in line with European values.” Huawei, it added, was best placed to guarantee those values.

The company also placed advertising in the most insider-focused journalism product in town, Politico Europe’s daily newsletter. “Brussels Playbook, presented by Huawei — Vote for 5G,” the subject line of an early-morning email read in late May this year.

Huawei has made donations to at least two major research institutions in Brussels that study European policy. Several other institutions receive funding from the Chinese government.

For Huawei, public records show that the amounts are relatively small, about $55,000 per organization. But they guarantee that the company is a player in the Brussels policy machinery.

In an interview, Mr. Liu said the company spent money on advertising and lobbying because of “attacks from the U.S. toward Huawei.” He said the company was “obliged to talk to the stakeholders in Europe and also the rest of the word, because the U.S. is very powerful — the U.S. government is super-powerful.”

“They’re trying to murder us,” he said.

In many ways, Huawei is using the Brussels playbook of major American technology players like Google, which has pioneered the use of public advertising campaigns in Brussels to influence legislation or regulations. The two companies even share a small, unassuming office building three blocks from the European Commission, where Google occupies three floors and Huawei one.

A review of the European Commission’s transparency register shows that Huawei employees met with top officials from the Commission, including commissioners and their top civil servants or members of their cabinets, 46 times in the past five years. The vast majority of those meetings were about 5G, the register shows.

Mr. Liu says his company’s continued presence in Europe demonstrates Washington’s failure to show any concrete evidence of wrongdoing by Huawei.

“It’s not fair on us as a private company to face such a challenge from a superpower,” he said. “And for Europe, we appreciate that the European stakeholders take a different approach.”

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At the Edge of the World, a New Battleground for the U.S. and China

TORSHAVN, Faroe Islands — The mere existence of the Faroe Islands is a wonder. Tall peaks of snow-patched volcanic rock jut out from the North Atlantic Ocean. Steep cliffs plunge into the deep waters of narrow fjords.

The remote collection of 18 small islands, which sit between Iceland and Norway, is known for a robust puffin population and periodic whale hunts. The semiautonomous Danish territory also has a thriving salmon industry.

Technology is not a common conversation topic among its 50,000 residents. Yet in recent weeks, the Faroe Islands have turned into a new and unlikely battleground in the technological Cold War between the United States and China.

The dispute started because of a contract. The Faroe Islands wanted to build a new ultrafast wireless network with fifth-generation technology, known as 5G. To create that new network, the territory planned to award the job to a technology supplier.

That was when the United States began urging the archipelago nation not to give the contract to a particular company: the Chinese telecommunications giant Huawei. American officials have long said Huawei is beholden to Beijing and poses national security concerns.

Then Chinese officials got involved. A senior Faroe Islands government official was recently caught on tape saying that the Chinese had offered to boost trade between the territory and China — as long as Huawei got the 5G network assignment.

“Commercially, the Faroe Islands cannot be very important to Huawei or anybody else,” Sjurdur Skaale, who represents the territory in the Danish parliament, said over breakfast in the capital of Torshavn this week. “The fact that the Chinese and American embassies are fighting over this as hard they are, there is something else on the table. It is about something else than purely business.”

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Credit…Ben Quinton for The New York Times

No location is now too small for the United States and China to focus on as they tussle over the future of technology. The Faroe Islands, whose proximity to the arctic gives it added military importance, joins countries across Europe caught in the middle of the two superpowers over Huawei, the crown jewel of the Chinese tech sector.

For more than a year, American officials have applied pressure on Britain, Germany, Poland and others to follow its lead in banning Huawei from new 5G networks. They argue the company can be used by China’s Communist Party to spy or sabotage critical networks. Huawei has denied that it helps Beijing.

But if the European nations side with Washington, they risk harming their economic ties to China, which has a growing appetite for German cars, French airplanes and British pharmaceuticals.

In the Faroe Islands, Bardur Nielsen, the prime minister, has tried defusing the conflict. In a statement, he said his government “has not been pressured or threatened by foreign authorities in relation to the development of a 5G network in the Faroe Islands.”

Any decision about awarding a contract to Huawei, he said, would be made by the local telecommunications company, Foroya Tele.

Foroya Tele said in a statement that it is testing different technologies. The choice of a 5G network provider, it said, “requires significant considerations given the scale and importance of the investment for the Faroe Islands.”

For the people of the Faroe Islands, the debate over Huawei and 5G is rooted in salmon more than in download speeds.

Salmon is central to the territory’s economy. More than 90 percent of the Faroe Islands’ exports are fish, including salmon, mackerel, herring and cod. In the surrounding waters, thousands of salmon can be seen splashing inside large netted rings, where they are bred for meals in Paris, Moscow, New York — and, increasingly, Beijing.

After 2010, the islands’ salmon exports to China picked up. At the time, the Chinese government had slowed the purchase of the fish from Norway in response to the awarding of the Nobel Peace Prize to Chinese human rights activist Liu Xiaobo in Oslo.

China now makes up about 7 percent of the Faroe Islands’ salmon sales. The Faroese government this year opened an office in Beijing to further expand trade.

In 2014, the islands’ salmon sales to Russia exploded after the European Union limited what fish other countries could export there. Those rules do not apply to the Faroe Islands because it is not a part of the European bloc.

In all, salmon exports from the Faroe Islands are expected to top $550 million this year, up from roughly $190 million a decade ago.

“This is the home place of Atlantic salmon,” Runi Dam, a consultant for local fishing companies, said while standing over giant pens filled with about 15,000 salmon each. “We have the perfect environment.”

Now the salmon business has become entangled in the fight over the 5G wireless network.

Credit…Ben Quinton for The New York Times
Credit…Ben Quinton for The New York Times

Last month, America’s ambassador to Denmark, Carla Sands, went public with warnings against Huawei. In an opinion piece in the local Faroe Islands newspaper, Ms. Sands said there could be “dangerous consequences” if the company was allowed to build the 5G network. When countries let Huawei in, she said, “they agree to work under Chinese communist rules.”

In another interview with Danish Broadcasting this week, Ms. Sands accused a Huawei executive responsible for the Nordic region of “working for the Chinese communists,” who are “exporting their spying, their corruption and bribery around the world.”

Ms. Sands declined to be interviewed.

At the same time, China’s ambassador to Denmark visited the Faroe Islands at least twice in the past two months.

This month, the Danish national newspaper, Berlingske, published the transcript of an audio recording in which a senior Faroe Islands official is summarizing one of the meetings. Herálvur Joensen, a senior aide in the Faroese government, was caught on tape saying China’s ambassador had threatened to block a trade deal — and more fish sales — if Huawei was not used for the 5G network.

“If Foroya Tele signed agreement with Huawei, then all doors would be open for a free-trade agreement with China,” he said in the recording. “If this doesn’t happen, then there won’t be a trade agreement.”

A spokesman for the prime minister said Mr. Joensen had not attended the meeting with the Chinese ambassador and was not available for an interview.

Credit…Ben Quinton for The New York Times
Credit…Ben Quinton for The New York Times

Huawei’s critics jumped on the revelations, saying the leaked recording showed the close links between Huawei and the Chinese government.

China’s ambassador, Feng Tie, wrote in Berlingske that the country did not pressure the Faroe Islands. “It’s my duty to secure that Huawei is treated fair and without discrimination in Denmark,” he said. “It’s not at all in Chinese culture to promote threats. Promoting threats is more known from the U.S.”

Huawei said in a statement it was not involved in any talks between the two governments.

In villages and harbors around the islands, people said they were bewildered about being thrust into a battle between China and the United States.

“It is a lice between two nails,” said Rógvi Olavson, who lives in Torshavn and is a lecturer at the local university. “You’re squeezed by the U.S. on the one hand and China on the other.”

While many residents said the Faroe Islands prefer the United States over China, several expressed anger at American officials for demanding that Huawei be banned. They said the company helped build the existing 4G network, which they use to make phone calls or share photos from some of the more far-flung areas of the islands.

Sissal Kristiansen, who designs sweaters and other clothing from Faroese wool, said she had listened to a recent interview with Ms. Sands.

“It awoke this, ‘Oh bugger off’ feeling in me,” she said. “We make our own decisions.”

Others are wary about harming economic ties with China, which they fear will retaliate if Huawei is not selected for the 5G network. Many locals remember an economic crisis in the 1990s, when about 10 percent of Faroese residents ended up moving abroad.

Today, unemployment on the islands is almost nonexistent — just 183 people were out of work as of Friday, according to government statistics. Like other Nordic countries, health care, education and other social services are free. There is virtually no crime.

“China is not just a nice customer, it is a necessity,” said Martin Breum, an arctic expert who has written about the Faroe Islands. The Faroese, he added, “have nothing else to sell to the rest of the world. They live off their fish.”

Martin Selsoe Sorensen contributed reporting from Copenhagen.