Josh Rogin - Chaos Under Heaven

The first sign of trouble was on January 31, when the New York Times ran a front-page story alleging top officials were concerned about Scaramucci’s White House appointment due to his “tangled interests” with a Chinese company. Scaramucci is convinced that Reince Priebus or Bannon planted the story to sour Trump on bringing him to the White House. It worked. The job disappeared. But the deal was still moving forward.

Scaramucci’s lawyers at Wachtell Lipton predicted that CFIUS would sign off on HNA’s acquisition of SkyBridge in about three months’ time, similar to the time it took to sign off on HNA’s acquisition of Ingram Micro. But HNA was simultaneously being investigated by CFIUS over several much larger US acquisitions it had in the pipeline. Government regulators had asked for more information about HNA’s murky ownership structure and its ties to the Chinese government. New Jersey software company Ness Technologies alleged in a lawsuit that the regulators found discrepancies in HNA’s explanations. In July 2017, Bank of America backed out of negotiations on a separate deal.

This was about the time Trump forgot about his previous concerns about Scaramucci and hired him to be White House communications director. He lasted only eleven days, fired after the New Yorker published his four-letter insults about Bannon and others—comments that Scaramucci had wrongly assumed were off the record. He was out of politics and out of Trump’s favor again, but the deal was still in limbo. Scaramucci still was willing to see it through.

The CFIUS investigations into HNA’s various US acquisitions—including the SkyBridge deal—dragged on and on, until eventually the CFIUS board came back with a mixed verdict. The deal for Scaramucci’s firm could go through only if the two companies completely separated their data and information technology systems. CFIUS didn’t want US investors’ information in Chinese hands.

But that made the whole point of the acquisition moot, Scaramucci said. Meanwhile, the tide had turned at HNA and orders from Beijing were to change course to reduce debt. “It never happened because they got forced to de-lever by the government,” he said. “The wheel had turned, it turned quickly, and this deal was toast.”

Scaramucci returned to SkyBridge and joined the anti-Trump resistance. He said he has no regrets, and that he simply did not realize that the risks of doing deals with Chinese companies had gone way up, both because of the mood in Washington and because of the behavior of those companies and the government they report to.

“I’ve made a lot of mistakes in my life,” he said, “but none bigger than working for the Trump administration.”

In that opening skirmish, the national security folks won out against the Wall Street crowd and their Chinese partners. That was new. For so many years, these deals had gone through without much scrutiny. Now, almost any firm connected to sensitive technology or the data of American citizens could be considered national security sensitive and worthy of government protection. This was the beginning of what became the greater US-China tech war.

8

The Battle for the Future

In the spring and summer of 2018, the trade war between the United States and China was starting to heat up. But within that war, there were the opening salvos of another: a tech war was in the offing between the world’s two largest economies.

China’s largest tech companies, such as Alibaba, Tencent, HNA, Huawei, ZTE, China Mobile, and others, had grown in just a few years from second-tier players to national champions that were expanding worldwide and threatening to dominate key sectors like telecom and high-end manufacturing. Beijing’s Made in China 2025 strategy had accelerated what was already a huge national investment in science and technological innovation that China combined with their diplomatic and military expansions into a project it called “military-civil fusion,” which blurred the line between the state and private industry.

US national security agencies had two fundamental probtems with this development. These firms were benefiting from the ongoing theft of US intellectual property, huge government subsidies, and other unfair trade practices, meaning the competition was fundamentally unfair for American and European firms. Also, the US intelligence community believed these firms either were working directly with Chinese military and intelligence agencies or were at the very least susceptible to being forced to do so at any time. Chinese tech embedded in the national infrastructure of the United States or any allied country was a security vulnerability that had to be avoided at all costs.

Top-level US officials like Steven Mnuchin, Robert Lighthizer, and Larry Kudlow were focused on making it through the opening curves of what they expected to be a long roller coaster of negotiations with their Chinese counterparts, led by Vice Premier Liu He. They knew that a crackdown on China’s tech industry would only complicate their job and make a deal harder. But inside the national security agencies, officials were figuring out how to wage the tech war at the same time the trade war was playing out.

Shooting the Messenger

Trump, for his part, conflated the two wars—the trade war and the tech war—all the time, mixing national security considerations and economic concessions and regular old favor trading in a way that made his officials crazy but made Xi Jinping very happy. The first glaring example of this was on May 13, 2018, when he tweeted that he was going to give a reprieve to Chinese telecom giant ZTE, which the Commerce Department had just announced penalties against as punishment for ZTE violating US sanctions on North Korea and Iran. Trump said he had ordered the Commerce Department to find a way to get ZTE “back into business, fast. Too many jobs in China lost.”

Trump had agreed to help ZTE during a phone call with Xi as a favor, according to John Bolton’s book, without getting anything in return. Mnuchin encouraged the move. Bolton, Lighthizer, and Peter Navarro tried to talk Trump out of it, but he wasn’t having it. After Trump’s tweet, White House spokeswoman Lindsay Walters tried to claim the president hadn’t just overruled his commerce secretary Wilbur Ross, saying in a statement that Trump wanted Ross to “exercise his independent judgment” to resolve the ZTE case “based on its facts.”

The commerce secretary’s judgment was good enough to know that he had to redraw the clear line between the economically driven trade war and the national-security-driven tech war—a line that his boss had just tried to erase, and not for the last time. Ross told the National Press Club on May 14 that the issue of punishing ZTE for violations was “separate from trade,” but he admitted he was looking at “alternative remedies.” But Trump just tweeted again, completely contradicting him. “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

Trump had now confirmed the linkage twice. National security and law enforcement issues were bargaining chips in his larger quest to make a deal on trade. This was Xi’s dream come true. For Beijing, every time there was a national security or law enforcement action against their illegal or corrupt behavior, Xi would try to throw it into the trade negotiations. It often worked.

I know for sure that Beijing asked Trump to pardon ZTE as part of the trade negotiations because I obtained a secret document from inside the talks that spelled it out in black and white. The document was a list of China’s demands that was handed over to American officials during the US delegation visit to Beijing the week prior. Bullet point 5 said, “Having noted China’s great concern about the case of ZTE, the U.S. will listen attentively to ZTE’s plea, consider the progress and efforts ZTE has made in compliance management and announce adjustment to the export ban”