Who wins what in Meng's deal

Richard Ip September 29, 2021 09:18

Huawei princess Meng Wanzhou has returned to mainland China with a hero's welcome. Things appear to play in China’s favour; the country looks like the winner in this prolonged legal struggle with the US and Canada. Likewise, US Senator Marco Rubio seems to agree that China has won, calling this deal with Meng “just another example of the Biden administration's dangerously soft approach towards Beijing.” But from a sanctions perspective, the winner appears not as clear, in that the deal could hugely weaken Huawei’s ability to fight against any future sanctions.

CHINA’S GAINS

One can hardly deny that this is a victory for the Chinese Communist Party (CCP). The event helps the CCP rally support from its population, boosting its internal legitimacy. The CCP did so via a host of publicity stunts, including the nation-wide broadcast of Meng’s landing in Shenzhen, the emotional and patriotic remarks from Meng which have gone viral on social media, thanking not only the CCP but in particular President Xi Jinping for the “unremitting” efforts to secure her ultimate return; and the People Daily’s triumphal editorial, asserting that the “national rejuvenation” is a “historical inevitability” that “no force can block.”. All these portrayed the CCP as a willing and, more importantly, capable protector of national dignity and all Chinese citizens.

Externally, the return of Meng dealt a blow to the US global sanctions enforcement efforts. Added to China’s growing arsenal of counter foreign sanctions measures is “hostage diplomacy”. Soon after the detention of Meng in Canada, the Chinese government arrested two Canadians, Michael Spavor and Michael Kovrig, for spying. The Chinese government, despite repeatedly denying any connections between Meng’s case and the Michaels’, did not even bother holding the duo for a bit longer to make their arrests look more unrelated to Meng but just let them go home right away alongside Meng’s release. This seems to further vindicate the notion that China has applied the hostage diplomacy strategy in Meng’s rescue.

The woeful detention conditions of the Michaels have haunted the Trudeau administration with tremendous domestic pressure to resolve Meng’s case. Witnessing Trudeau’s troubles, one would doubt that any country would want to help the US to make any high-profile arrests in the future.

FUTURE SACNTIONS – DEFENCELESS

Is China the sole winner then? Not so fast. Meng’s admission to wrongdoing could put Huawei in a much weaker position to fight against any future US sanctions.

People are well aware that Huawei is subject to the US sanctions, but much fewer know the details of the sanctions and the entailing restrictions Huawei is facing. Simply put, not everyone can tell the differences between the Entity List, which Huawei has been designated in, and the Specially Designated Nationals and Blocked Persons List (SDN), which, if designated, will certainly deal a bigger blow to Huawei’s global operations.

The Entity List is a form of trade restriction barring US individuals and companies from exporting restricted products to a designated entity. As such, in practice, US individuals and companies can still engage with Huawei on activities outside the remit of the trade restrictions. SDN, however, is much broader in scope. At the basic level, US individuals and entities are prohibited from dealing with SDNs under any circumstances unless otherwise authorised.

In fact, Huawei was just one step away from being put to the SDN list. Reuters previously reported that, in 2019, the Trump administration mulled designating Huawei as a SDN, but eventually gave up after considering the foreign and domestic repercussions. However, the political will to further sanction Huawei still exists amongst US politicians. Around the same time of the announcement of Meng’s deal, the US Commerce Secretary Gina Raimondo said that the Biden administration would take further actions against Huawei “if necessary”. She made this assertion in response to the request from a group of Republican politicians pushing for more such actions against the company. As such, it almost looks like a bipartisan consensus on what to do next against Huawei.

Was Raimondo referring to the SDN list? Not sure. One thing is clear though. With Meng’s admission, Huawei could hardly fight against the SDN designation when it comes. Again, some background here. A sanctioned subject can appeal against the designation in a US district court. The chance of success is very low though as the courts generally defer to the administration on sanctions-related matters. But this is not impossible. In March 2021, Xiaomi won a lawsuit in a US district court against the government's decision to designate it as a “Communist Chinese military company”, prohibiting any US individuals and entities from investing in. Xiaomi successfully overturned the designation by arguing that the US government did not provide any evidence to back up the designation.

Unlike Xiaomi, Huawei could probably give up any legal defence in the event of an SDN designation because Meng just admitted the Iran sanctions violations on behalf of the company.

EVERYONE GAINED SOMETHING

Meng’s return helps ease up the tension a bit between the US and China and allow Canada to breathe a sigh of relief. Neither China nor the US is the absolute winner though. China gains a lot but the US now holds the aces against Huawei, the crown jewel of China’s technological power projection. I do hope this sanctions perspective could give readers yet another angle to look at the event.

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Richard Ip

Founder of Richard Ip Consultancy, a due diligence and sanctions compliance advisory business, the writer is a global political and compliance risk consultant with a special focus on Asia.