U.S. officials are seeking to block an undersea cable backed by Google, Facebook Inc. and a Chinese partner, in a national-security review that could rewrite the rules of internet connectivity between the U.S. and China, according to people involved in the discussions.
The Justice Department, which leads a multiagency panel that reviews telecommunications matters, has signaled staunch opposition to the project because of concerns over its Chinese investor, Beijing-based Dr. Peng Telecom & Media Group Co., and the direct link to Hong Kong the cable would provide, the people said.
Ships have already draped most of the 8,000-mile Pacific Light Cable Network across the seafloor between the Chinese territory and Los Angeles, promising faster connections for its investors on both sides of the Pacific. The work so far has been conducted under a temporary permit expiring in September. But people familiar with the review say it is in danger of failing to win the necessary license to conduct business because of the objections coming from the panel, known as Team Telecom.
Team Telecom has consistently approved past cable projects, including ones directly linking the U.S. to mainland China or involving state-owned Chinese telecom operators, once they were satisfied the company responsible for its U.S. beachhead had taken steps to prevent foreign governments from blocking or tapping traffic.
If the U.S. rejects Pacific Light’s application, it would be the first time it has ever denied an undersea cable license based on national-security grounds, and it could signal regulators are adopting a new, tougher stance on China projects.
The threat of a failed approval process reflects growing distrust of Chinese ambitions and comes amid escalating tensions between China and the U.S., part of a broad rivalry between the world’s two largest economic powers. A prolonged trade conflict has each side affixing tariffs on hundreds of billions of dollars in goods flowing between the two countries, while Washington has sought to blunt Beijing’s ambitions to expand military and economic influence in Southeast Asia, the Pacific, Africa and elsewhere.
A number of U.S. officials—as well as some from allied countries—also have been waging a high-profile campaign to exclude China’s Huawei Technologies Co. from next-generation mobile networks, and to limit its role in the undersea cable networks that ferry nearly all of the world’s internet data.
The Pacific Light project cost at least $300 million to build based on its route, according to consultants who advise companies on subsea cable construction. Companies like Google and Facebook have spent the past decade funding similar cables to handle ever-growing network traffic between the U.S. and Asia. The new link to Hong Kong would give them greater bandwidth to a major regional internet hub with links to growing markets in the Philippines, Malaysia and Indonesia as well as mainland China.
Team Telecom’s concerns over Pacific Light include Dr. Peng’s Chinese-government ties and the declining autonomy of Hong Kong, where pro-democracy protesters have been holding massive demonstrations for months against Beijing’s efforts to integrate the territory more closely. Dr. Peng is China’s fourth-biggest telecom operator. Listed in Shanghai, the private firm serves millions of domestic broadband customers. In the past, a cable link to Hong Kong would have been viewed as more secure than one to mainland China, but the distinction is becoming less relevant, these people say.
Proponents of the project say its approval would give the U.S. better oversight over the data that flows through the cable because Team Telecom could advise the FCC to force the companies to agree to certain conditions to protect security. Even if the U.S. thwarts this particular cable, the need for greater data capacity will still exist, and that data will just find its way through other cables that aren’t necessarily within the U.S.’s jurisdiction, they say.
The Internet’s Undersea Arteries
Roughly 380 active submarine cables carry almost all the world’s intercontinental internet traffic via about 1,000 landing stations.
Sources: U.K. Cable Protection Committee; Alcatel Submarine Networks
Team Telecom last year reversed its long-held stance on Chinese applications to provide telecom services through U.S. networks, and recommended for the first time the denial of an application based on national-security and law-enforcement concerns. In May, the Federal Communications Commission adopted the recommendation that came after years of deliberation, voting unanimously to deny an application from China Mobile Ltd. ’s U.S. arm even though it had previously approved applications from fellow state-owned operators China Telecom and China Unicom .
Though the FCC makes the final decision on whether to grant a license for the Pacific Light project, it has historically deferred to recommendations from Team Telecom after its members coalesce around a unified view. The ad hoc group has no resolution mechanism in the event of a dispute. It isn’t known how strongly other members of the team, including the Defense and Homeland Security Departments, feel about the issue.
Should the Justice Department hold firm in its opposition and win support from other Team Telecom members, the group’s negative view would likely kill the project. If other team members decide to fight the Justice Department on the issue—and it refuses to back down—any approval could be delayed indefinitely, leaving the project in limbo. It is possible regulators might extend the temporary permit in the interim. Team Telecom, meanwhile, could still recommend the FCC approve the project if the Justice Department changes its position.
Pacific Light Data Communication Co., the Hong Kong company managing the cable project, said it has already installed more than 6,800 miles of the cable system, which will be ready for service by December or January. Senior Vice President Winston Qiu said he hadn’t heard of any U.S. regulatory problems. “We didn’t hear any opposition,” he said.
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What are your thoughts on the U.S. citing national-security concerns as a reason for possibly stopping this venture? Join the conversation below.
Dr. Peng didn’t respond to emailed and faxed requests for comment. Repeated calls to its offices and those of its subsidiaries and biggest shareholder went unanswered.
A Google spokeswoman said the company has “been working through established channels for many years in order to obtain U.S. cable landing licenses for various undersea cables. We are currently engaged in active and productive conversations with U.S. government agencies about satisfying their requirements specifically for the PLCN cable.” A Facebook spokeswoman declined to comment.
A Justice Department spokesman declined to comment on the project and said its reviews and recommendations are “tailored to address the national-security and law-enforcement risks that are unique to each applicant or license holder.” The Pentagon referred questions to the Justice Department as the team’s lead agency. Spokesmen for the Department of Homeland Security and the FCC declined to comment.
The Pacific Light project has taken an atypical path. Google ownerAlphabet Inc. teamed up with Facebook in 2016 to provide its U.S. financing, adding to the tech companies’ growing inventory of internet infrastructure. Google took responsibility for its U.S. landing site. The Hong Kong end fell to a company controlled by a mainland Chinese real-estate magnate that had only recently entered the telecom sector.
The Chinese partner later sold its majority stake in the project to Dr. Peng, a company with interests in telecom, media and surveillance technology. In 2014, Dr. Peng signed a strategic cooperation agreement with Huawei to jointly research cloud computing, artificial intelligence and 5G mobile technology, according to an exchange filing. Dr. Peng’s website lists Huawei as a partner.
Dr. Peng’s chairman, Yang Xueping, is a former Shenzhen government official, according to the company’s website, and its subsidiaries have worked on several projects with government entities, including building a fiber-optic surveillance network for Beijing police, its website and filings show. Last year, Dr. Peng said in an exchange filing that two wholly owned subsidiaries had been fined 2 million yuan ($279,000) after some of their executives were convicted of bribing Chinese officials in connection with Beijing police projects.
Whether or not US President Donald Trump and his Chinese counterpart, Xi Jinping, agree to another truce at the upcoming G20 summit in Osaka, the Sino-American conflict has already entered a dangerous new phase. Though a negotiated settlement or a managed continuation of the status quo are possible, a sharp escalation is now the most likely scenario.NEW YORK – The nascent Sino-American cold war is the key source of uncertainty in today’s global economy. How the conflict plays out will affect consumer and asset markets of all kinds, as well as the trajectory of inflation, monetary policy, and fiscal conditions around the world. Escalation of the tensions between the world’s two largest economies could well produce a global recession and subsequent financial crisis by 2020, even if the US Federal Reserve and other major central banks pursue aggressive monetary easing.Much, therefore, depends on whether the dispute does indeed evolve into a persistent state of economic and political conflict. In the short term, a planned meeting between US President Donald Trump and his Chinese counterpart, Xi Jinping, at the G20 Summit in Osaka on June 28-29 is a key event to watch. A truce could leave tariffs frozen at the current level, while sparing the Chinese technology giant Huawei from the crippling sanctions that Trump has put forward; failure to reach an agreement could set off a progressive escalation, ultimately leading to the balkanization of the entire global economy.
JAW-JAW OR WAR-WAR?
. On the trade front, the US wants China to buy more American goods, reduce tariff and non-tariff barriers, open more financial and service sectors to foreign direct investment, and commit to maintaining currency stability and transparency with respect to foreign-exchange data.
On technology, the US is demanding that China strengthen intellectual-property protections, cease making the transfer of technology to Chinese firms a condition of market entry for US (and other) companies, and crack down on corporate cyber espionage and theft. A temporary deal could include any of the above, with the US offering medium-term (through the end of 2020, and possibly longer) exemptions to Chinese tech firms that use US components, semiconductors, and software. This would leave Huawei severely constrained, but not dead in the water.
The second possibility is a full-scale trade, tech, and cold war within the next 6-12 months. In this scenario, the US and China would adopt rapidly diverging positions after failing to successfully restart negotiations (with or without a truce). The US would follow through with import tariffs – starting at 10% but increasing to 25% – on the remaining $300 billion worth of Chinese goods that have so far been spared. And the Trump administration would pull the trigger on Huawei and other Chinese tech firms, barring them from purchasing components and software from US companies.
China, meanwhile, would take steps to protect its economy through macro-level stimulus, while retaliating against the US through measures that go beyond tariffs (such as expelling American firms). Huawei might survive within the Chinese market, but its growing global business would effectively be crippled, at least for the time being.
Beyond trade and technology, this scenario also implies increased geopolitical and military tensions. The possibility of some type of conflict over the East and South China Seas, Taiwan, North Korea, Xinjiang, Iran, or Hong Kong could not be ruled out.
Finally, in the third scenario, China and the US would fail to reach a deal on trade and technology, but they would forego rapid escalation. Instead of plunging into a total trade and technology war, the two powers might ratchet up their conflict more gradually. The US would impose new tariffs, but keep them at 10%, while renewing only temporarily exemptions that allow Huawei and other Chinese firms to continue purchasing key US-made inputs, while retaining the option of pulling the plug on Huawei at its discretion. Negotiations could continue, but the US would essentially hold a veto over Huawei’s bid to develop 5G and other key technologies of the global economy. Given that Trump could suddenly pull the plug on the company whenever it suits him, China’s leaders would probably abstain from blatant full-scale retaliation, but would still intervene to minimize the economic damage.
THE GOLDILOCKS OPTION…
The third scenario is the most likely for now, because China is playing a waiting game until November 2020, to see if the US elects a more even-keeled president. Even with a truce, therefore, any negotiations that are relaunched after the G20 summit will probably drag on indefinitely, with no real signs of progress. In the meantime, the Trump administration will want to apply additional pressure on China, while keeping its options open. Better, then, to start with a 10% tariff on that remaining $300 billion worth of exports. The US could always hike the rate to 25%, but at the risk of raising the costs of goods that many of Trump’s own lower-income voters rely on.
Where does that leave us? If both Xi and Trump find the third scenario attractive, neither will be willing to meet halfway on a deal. That makes the second scenario – a full-scale trade and technology war – the most likely outcome, given that a controlled escalation is inherently unstable.
As matters stand, the probability of a deal eventually being reached is low (my colleagues and I put it at just 25%). Still, we will know more after the G20 summit later this month. If Trump and Xi fail to broker a truce or a temporary agreement regarding Huawei, the US will probably follow through with 10% tariffs on the remaining $300 billion worth of Chinese exports. We will then be in the initial stages of the third scenario.
On the other hand, if Trump and Xi hold a friendly meeting and agree to a truce, the US will probably withhold new tariffs, and we will be in the early stages of the first scenario. This would make the probability of the two sides reaching a deal slightly higher. But a lurch to the third scenario – a precipitous escalation of the current confrontation – would still be more likely, followed eventually by a descent into a full-scale conflict. Where it will end is anyone’s guess, but an escalating trade and tech war is, in my view, more likely than an eventual deal.
The U.S. and Chinese governments both sent signals ahead of their trade talks in Washington last week that a pact was so near they would discuss the logistics of a signing ceremony.
In a matter of days, the dynamic shifted so markedly that the Chinese deliberated whether to even show up after President Trump ordered a last-minute increase in tariffs on Chinese imports because the U.S. viewed China as reneging on previous commitments.
Inside the cloistered Zhongnanhai government compound in Beijing, President Xi Jinping and his close advisers discussed how to respond to the tariff increase, given the talks were just days away, according to Chinese officials with knowledge of the decision-making process.
After huddling Tuesday to analyze a press conference given by the U.S.’s two top negotiators, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, Chinese officials concluded that they should travel to at least avoid a rift that could be difficult to repair.
The recommendation went to China’s chief negotiator, Liu He, and ultimately to Mr. Xi. He decided to send the team even though Beijing was fully aware that the trip held little prospect of progress, given how quickly problems had arisen. “The goal was simply to keep the talks going,” said one of the Chinese officials with knowledge of the matter.
By the end of the week, that was as much as both sides could cite for their efforts: the avoidance of a serious rupture that would doom any prospect of a future deal and a commitment to stay near the negotiating table.
So far, the trade talks have provided little evidence that the two nations have found a formula for how to negotiate successfully since Messrs. Trump and Xi met in Buenos Aires Dec. 1, which paved the way to Washington last week.
China didn’t immediately impose new strictures on U.S. businesses, as it has done when things weren’t going well in the past. Mr. Liu is expected to brief Mr. Xi on the discussions he had in Washington before Beijing decides on the next course of action, according to the officials familiar with the process.
.. Bridging the trade rift may ultimately depend on the personal chemistry between President Trump and President Xi and their willingness to push matters forward after months of negotiations that have been full of positive intentions but thwarted by miscalculations, accusations of backtracking and unfulfilled expectations.
“The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding,” said one person involved in the discussions on the U.S. side.
“We’ve expressed some pretty serious frustration at times,” this person said. “It’s been a necessary ingredient to success. You can be nice to someone, but sometimes you need to say ‘stop screwing me.’ ”
.. “We were in the process of planning for a signing summit with President Trump and President Xi upon the completion of this agreement,” Mr. Mnuchin later told reporters. One of the issues was where to hold the celebratory moment: Washington or Mr. Trump’s golf estates in Mar-a-Lago, in Florida, or Bedminster, N.J., say Trump aides.
To the Chinese, this was a matter of honor: The U.S. should trust Beijing to make the changes they said they would make, even if that meant changing regulations rather than laws. Besides, the U.S. was being unfair in refusing, upon the signing of a deal, to remove tariffs that had been assessed in the yearlong fight, the Chinese believed.
“There is a real desire on our end to keep the tariffs on,” one White House official said. “That is a sticking point.”
Shortly after Mr. Trump’s announcement of the tariff increase, Beijing’s trade negotiators, who had booked Air China tickets to Washington, received an urgent order: Stay put until further notice. “Looks like we’re not going,” one of them said early Monday morning.
Up until that moment, China’s leadership had expected the trip to bring months of negotiations to a close, according to Chinese officials close to the negotiation process, given that Chinese diplomats were already in discussion with their American counterparts about a possible summit between Messrs. Xi and Trump to finalize a trade agreement.
Now, the pressing question for Beijing became: Should it pull out of the planned talks to adhere to its longstanding public position that China doesn’t negotiate under threat? Or should China bite the bullet and still send the delegation to avoid a complete collapse of negotiations?
The Chinese side wanted more information from Washington before making the decision. But senior officials knew news of Mr. Trump’s tweets would inevitably cause market anxiety. The first order of business Monday morning: China’s central bank sped up a plan to release more funds for banks, a stimulus measure aimed at calming jittery investors and businesses.
State-backed funds were also instructed to buy what was necessary to prevent a free fall of shares. China’s Foreign Ministry spokesman released a statement at Monday’s regular press briefing that said only that the Chinese delegation was “preparing to travel to the U.S.” The spokesman didn’t say when the team would depart or give additional details.
On Tuesday morning, a group of officials at the vice minister level, including Liao Min, a trusted aide to Mr. Liu and a vice Finance Minister, and Wang Shouwen, a vice Commerce Minister, reached the conclusion the talks should proceed, a position endorsed by Mr. Xi though expectations of a positive result had fallen sharply.
The U.S. side made some calls that turned off the Chinese, too. By insisting that it wouldn’t remove any tariffs upon closing a deal, the U.S. gave Beijing little incentive to accept tough conditions. The U.S. position remained firm: no tariff removal until Beijing showed it would carry through on the commitments it made under the deal. On top of that, the U.S. wanted China to pledge not to retaliate if the U.S. were to reimpose tariffs if it found China in violation of some provisions.
Mr. Trump on Thursday let it be known he didn’t want the U.S. to appear soft on China, according to one person briefed on the matter.
The two days of negotiations went amicably nonetheless, according to people tracking the talks. Messrs Lighthizer and Mnuchin, who both were in the discussions, took Mr. Liu to a working dinner at the Metropolitan Club, a ritzy private club near the U.S. Trade Representative’s headquarters that is a Lighthizer favorite. Mr. Liu continued the talks on Friday despite the U.S. implementing the higher tariffs very early Friday morning.
Later that morning, Mr. Lighthizer greeted the Chinese envoy at the door of the USTR office—a gesture he rarely makes, but one which he could be sure would be captured by photographers and camera crews waiting outside.
By then, though, the U.S. team went into the talks not expecting to do a deal, figuring they would have a “non-meeting,” according to one person briefed on the discussions. U.S. officials at least wanted to make sure they didn’t leave with a complete break. The goal of the meeting was to be able to say the U.S. negotiators were still trying, this person said.
In an interview with Chinese media Friday, Mr. Liu disputed U.S. accounts that China reneged on commitments it had already made as part of the trade talks. “We are very clear that we cannot make concessions on matters of principle,” Mr. Liu said. “We hope our U.S. colleagues understand this.”
In his first week he withdrew from the unratified 12-nation Trans-Pacific Partnership. He prepared to pull out of the U.S.-Korea Free Trade Agreement (Korus) and the North American Free Trade Agreement. Earlier this year he imposed steep tariffs on imports of steel and aluminum, using a little-used national security law, and threatened the same for autos.
Today, Korus and Nafta have been replaced by updated agreements(one not yet ratified) that look much like the originals. South Korea accepted quotas on steel. Mexico and Canada agreed to higher wages, North American content requirements and quotas for autos.
These represent a step back from free trade toward managed trade, but they will have little practical effect: The limits on how many cars Mexico and Canada can ship duty-free to the U.S., for example, exceed current shipments. Mr. Trump hasn’t stopped threatening auto tariffs, but for now his officials have elected instead to seek broader tariff reductions with Japan and the European Union.
.. Meanwhile, the U.S. trade deficit that incenses Mr. Trump has grown during his presidency, especially with China and Mexico, as a strong American economy sucks in imports. His exhortations to manufacturers to bring jobs back to the U.S. have largely fallen on deaf ears.