The China-US-Canada Huawei Crisis

India’s elections; Uzbek reforms; Malaysia takes on Goldman Sachs

The Big One.

Rule of law meets hostage diplomacy.

Image result for meng wanzhou

The United States—with an important assist from Canada—has seemingly opened up a new front in the tech war with China. Or so you might think from the manner in which Huawei CFO Meng Wanzhou’s arrest has been covered in China’s state media.

Make no mistake: Meng’s arrest in Canada over bank fraud charges is a watershed event and it has significance for the nature of China’s relationship with both Canada and the United States, but it was a result of an independent legal process in the United States. The specifics have gotten lost amid state media sensationalism in China and unfortunate statements in the United States. For instance, U.S. President Donald J. Trump’s implication that he might interfere in Meng’s prosecution, instead of reaffirming the rule of law, undermined it considerably, confirming Beijing’s worst suspicions.

The Diplomat’s Bonnie Girard explains what’s behind the public backlash to Meng’s arrest, which has inflamed nationalist sentiment over what is seen as one of China’s most cherished national brands. A perceived attack on Huawei becomes an attack on the “Huawei story” itself, which may as well be the story of China over the last 30 years itself.

The Huawei story is told and sold in China as a romanticized rags-to-riches saga: A middle-aged rank-and-file retired People’s Liberation Army officer takes his meager savings to form a private company, nearly unheard of in 1987. He braves political, financial, and societal disdain and discrimination to eventually create one of the world’s largest and most successful telecommunications equipment companies, going head to head with Western competitors, and winning.

Meng’s case comes not long after U.S. action against ZTE, too. At The Diplomat, Jin Kai contextualizes Meng’s arrest in the aftermath of the ZTE saga.

The Canada angle in Meng’s arrest adds an interesting layer to all this, of course. Ottawa complied with a U.S. extradition request by arresting her and incurring China’s wrath in the process. Chinese retaliatory action, meanwhile, has been appalling. Two Canadian citizens—Michael Kovrig and Michael Spavor, both of whom I’ve met in recent months—have been detained and hit with unspecified charges of undertaking activities that harm China’s national security. A third Canadian—as yet unnamed—has also been detained.

This is, of course, a trumped-up pretext for Chinese authorities to effectively undertake a form of hostage diplomacy, deepening a rift with Canada. Kovrig and Spavor’s arrests, alongside Meng’s prosecution and possible extradition, may mark the start of a prolonged lull in Ottawa-Beijing ties, similar to the freeze that came over China’s ties with Norway after the 2011 Nobel Peace Prize went to dissident Liu Xiaobo.

The non-authoritative, but Communist Party-linked Global Times made clear that the move with Kovrig and Spavor is effectively a ransom: “It is quite simple to end the crisis between China and Canada by giving back Meng’s complete freedom.” Donald Clarke put it rather aptly in the Washington Post:

The critical element of a hostage-taking is that the hostage-taker must tell you that it’s a hostage-taking and what his demands are, otherwise the whole point of taking hostages is defeated. In this case, official and quasi-official Chinese sources have been clear. The Chinese ambassador to Canada has not just admitted it; he has also proclaimed it in an op-ed in the Globe and Mail, saying that those who object to the Kovrig detention should reflect on Canada’s actions.

As I wrote recently, the United States and Canada should stand shoulder-to-shoulder in allowing Meng’s case to play out by the book. Unlike Spavor and Kovrig, who received limited Canadian consular assistance days after their initial detention, Meng has access to top legal counsel and was granted supervisory bail after a hearing. China’s overzealous reaction might backfire, too.

Spavor’s case, in particular, should send a chill through the spines of expat businesspeople based in China. Spavor, an entrepreneur involved in cultural exchanges with North Korea, was simply plucked up by Chinese authorities as a geopolitical pawn and now risks losing everything as a result. Other crises could similarly implicate China-based entrepreneurs from other countries.

This episode is likely far from over, however. Meng may be extradited to the United States, which would expand the scope of China’s retaliation. Stay tuned.

Bottom Line: The arrest of Huawei’s CFO over bank fraud charges has opened a serious rift between China and Canada and is far from over.

East Asia.

U.S. President Donald J. Trump and the North Korean regime have fundamentally different perceptions of just how well things are going when it comes to denuclearization diplomacy. Trump had the following to say last week on Twitter:

Donald J. Trump@realDonaldTrumpMany people have asked how we are doing in our negotiations with North Korea - I always reply by saying we are in no hurry, there is wonderful potential for great economic success for that country....
Donald J. Trump@realDonaldTrump....Kim Jong Un sees it better than anyone and will fully take advantage of it for his people. We are doing just fine!

You might recall that the Obama administration’s North Korea policy after the failed 2012 “Leap Day Deal” was pejoratively dubbed “strategic patience.” What we have here might be another version—perhaps “astrategic patience,” given the administration’s confused approach to Pyongyang.

North Korea, meanwhile, responded to Trump indirectly through an important—but non-authoritative—statement attributed to a think tank within its Ministry of Foreign Affairs. The core point was that “anti-DPRK sanctions and pressure” will “block the path to denuclearization on the Korean Peninsula forever.”

Moreover, the North Koreans clearly don’t share the same sense of time as Trump does. “The U.S. should realize before it is too late that ‘maximum pressure’ would not work against us and take a sincere approach to implementing the Singapore DPRK-U.S. Joint Statement,” the statement noted. Pyongyang will be unlikely to revert to its old ways of testing ballistic missiles, lest that make it look like the unreasonable party, but there are serious signs that North Korea isn’t willing to wait around for the Trump administration to break away from its demands of North Korea’s complete denuclearization before any inducements or benefits can come to Kim.

Bottom Line: We may be seeing the beginnings of a more turbulent U.S.-North Korea diplomatic process in spring 2019. Let’s wait to hear from Kim Jong Un now during his New Year’s Day address for a better sense of where things might go.

In Case You Missed It: Make sure you catch our editor-in-chief Shannon Tiezzi’s analysis of Chinese President Xi Jinping’s hotly anticipated speech on the 40th anniversary of China’s “reform and opening” policy. Her bottom line on Xi’s bottom line: “more, not less, CCP control over the economy.”

South Asia.

There’s a big takeaway from India’s recent assembly elections, which is that, for the first time in 2014, the Indian National Congress showed up with a generalizable sort of political success. After its embarrassing defeat in 2014, largely on a wave of anti-incumbency sentiment, India’s grand old party has had a few victories here and there, and partnered up with regional parties, but the latest assembly elections are something else and set up a potentially interesting race to the next general elections, which are just about 6 months away now.

Indian Prime Minister Narendra Modi and his nationally dominant Bharatiya Janata Party remain favored going into next year’s general elections cycle, but they may be forced to rely on coalition partners to actually form a government. Meanwhile, the Congress’ strong showing in the Hindi belt states of Chhattisgarh and Madhya Pradesh might not translate to general election wins given the differing districting and its effects on first-past-the-post voting outcomes. (For an interesting exercise, Brookings India’s Dhruva Jaishankar took a look at how general elections might turn out in India if state election results were predictive.)

Alongside the assembly elections, it’s worth paying attention to the recent tussle at the top of the Reserve Bank of India, where Urjit Patel, a well-respected independent economist, was effectively pushed out of the governorship amid an increasingly acrimonious relationship with the government. Patel was replaced by a proponent of India’s disastrous demonetization initiative, which is widely seen as a macroeconomic misstep. I shared a few of my thoughts on that at The Pulse. The central point from the RBI episode is that in the lead-up to the elections, the BJP is unlikely to revisit the legacy of its two banner macroeconomic initiatives at the central level: demonetization and the poorly implemented, but radical, Goods and Services Tax. Instead, the party is likely to pivot toward the politics of Hindu nationalism and let the Congress turn the 2019 general elections into a referendum on Modi’s national economic performance.

Bottom Line: India’s 2019 election season is off to the races.

Bonus: On the foreign policy front, this week marked a historic visit by Ibu Solih, the new president of the Maldives, to India. His visit marks the start of a recalibration between the two countries. Critically, New Delhi is bringing the big guns to pull Malé away from China; Modi announced a $1.4 financial assistance package comprising multiple instruments. Solih breaks with his predecessor, the authoritarian-leaning Abdulla Yameen, in favoring an “India First” foreign policy.

Southeast Asia.

Malaysia’s 1MDB scandal has come a long way. This week, the government finally filed criminal charges against the bulge bracket investment banking firm Goldman Sachs. Malaysia’s Attorney General Tommy Thomas has outlined the damages that the country is seeking to recuperate from Goldman in fines; it is seeking several billion dollars. “Having held themselves out as the pre-eminent global adviser ... the highest standards are expected of Goldman Sachs. They have fallen far short of any standard,” Thomas said in a statement (PDF).

The announcement immediately resulted in a hit to Goldman’s stock price, which fell 2.7 percent on Monday, taking it closer to ending the calendar year down more than 25 percent. The bank’s fundamental role at the center of the scandal is in arranging $6.5 billion in bonds back in 2012 and 2013. Malaysian and U.S. authorities have alleged that Goldman employees got to work with 1MDB by providing bribes and profited handsomely from the ensuing deals. “Goldman Sachs benefited by receiving underwriting and arranging fees of approximately USD600 million which was several times higher than the prevailing market rates and industry norms,” Thomas noted.

Goldman has said the charges are “misdirected” and will be presenting its case soon. It’s unclear what tack exactly the bank will take in its defense, but what’s clear is that this case is likely to be fought out under a great deal of public scrutiny, shedding additional light on the circumstances of the bank’s involvement with 1MDB. Tim Leissner, a former partner at the bank, pleaded guilty to U.S. charges related to the case earlier this year. (The U.S. Justice Department announced Leissner’s guilty plea here, alongside indictments for Jho Low and Roger Ng.)

Bottom Line: Get ready for the next phase in the 1MDB saga: a long drawn-out legal battle between Goldman Sachs and Malaysia.

In Case You Missed It: Cambodia’s joint opposition party is in the middle of an internal schism after the 2018 elections. Read Alex Willemyn’s reporting for The Diplomat on the subject.

Central Asia.

Central Asian analysts have been closely following Uzbekistan’s ongoing reforms under President Shavkat Mirziyoyev. While the country has doubtless made progress from the days of Islam Karimov’s iron-fisted rule, not all aspects of reform are keeping up with expectations. For instances, at least one of the most significant components of the adopted reform program at the start of 2018 has become bogged down with delays. The issue at hand is the reform of the country’s propiska system.

What is a propiska? Umida Hashimova explains.

In Uzbekistan, the propiska is a compulsory domicile legally tying a person to the address stamped in a passport. An individual is required to live and work in the city or town which their propiska indicates. Children can receive public education only at the location their parents have their propiska. Failure to produce an adequate propiska can lead to a fine. This practice, inherited from the Soviet period, is maintained in other former Soviet countries as well, but the stringency and enforcement of the regulation in Uzbekistan, more specifically in Tashkent and the Tashkent region, is among the most strict.

The system presents a significant challenge to ongoing reforms, including economic liberalization given the effect it has on immobilizing the national labor force through restrictive residency requirements. The system has long backfired. For instance, the capital of Tashkent is the most attractive economic hub within the country for workers based in rural areas. But with the inability to procure a propiska, workers are incentivized to leave Uzbekistan all together.

Hashimova concludes that there remains a vibrant pro-Propiska contingent in the Uzbek legislature and that the government “is not ready to abolish this system fully.”

Bottom Line: Uzbekistan’s propiska system isn’t going anywhere anytime soon, marking a significant setback to Mirziyoyev’s reform program.

Don’t Miss It: Read a translated interview with Fareed Tukhbatullin, a Turkmen activist-in-exile, on the sources of the country’s food shortages. “Turkmenistan today is probably resembling the times when we stood in line for bread, flour, and milk in the years 1990-91,” he notes.

Asia Defense.

We talked about Japan's probable plans to convert the Izumo-class helicopter destroyer into an aircraft carrier in the last edition and that story remains at the top this time too. On Decembe 18, Prime Minister Shinzo Abe’s cabinet officially approved plans to convert the JS Izumo and JS Kaga, the first two vessels in the Izumo-class respectively, to carrier capable of operating short take-off and vertical landing (STOVL) fighters—specifically, the U.S. Marine Corps variant of the F-35 Joint Strike Fighter, the F-35B.

As my colleague Franz-Stefan Gady explained at our Asia Defense channel:

Japan’s new National Defense Program Guidelines (NDPG), which lay out the Japan Self Defense Force (JSDF) capability targets and needs for the next decade, call for the first deployment of Japanese aircraft carriers since the end of the Second World War. According to the fiscal 2019-2023 midterm defense buildup program, the conversion of the two 27,000-ton helicopter destroyers is expected to take place over the next five years.

The NDPG has other notable components too. One of the biggest outside of the Izumo conversions is the development of new longer-range missiles to deal with the threat posed by Chinese forces within the first island chain. This has long been under consideration in Tokyo and would present a significant augmentation of Japan’s otherwise constitutionally limited offensive capabilities. The current plans would see the development and deployment of Standoff Missiles, capable of striking targets at ranges up to 900 km. Japan is also likely to explore the development of new types of missiles, including hypersonic cruise missiles.

All of these initiatives and more will get their start under Tokyo’s new Midterm Defense Program, which includes a whopping $240 billion earmarked for defense spending over a five-year period starting with the 2019 fiscal year.

Bottom Line: Japan is getting serious about new capabilities, including aircraft carriers and standoff missiles.

One to Watch: Japan is in discussions with the Philippines to sell Manila an advanced radar to boost the Philippine Armed Forces’ surveillance capabilities. The Diplomat's Prashanth Parameswaran discusses the possible sale.

Extras.

Don’t miss the latest Asia Geopolitics podcast where we preview 5 elections you should keep your eye on in 2019, including the Indian general election and the Indonesian presidential elections.

Please do feel free to reach out with comments, tips, and feedback at ankit@thediplomat.com and follow me on Twitter at @nktpnd and The Diplomat at @Diplomat_APAC.