War or sabre-rattling: The US confronts China

War or sabre-rattling: The US confronts China

27 May 2020 | Alan Burkitt-Gray

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Telecoms is now at the front line of the confrontation between the US and China. But why is the FCC wanting to ban Chinese operators, asks Alan Burkitt-Gray.

The senior telecoms executive peered at me over the Webex call from a long way away. I can’t say who, and I can’t say where they were calling from, because this executive was speaking on terms of anonymity. “What was the first British act of war against Germany in August 1914?” the executive asked.

That was the month World War One broke out across Europe, leading to the deaths of 20 million people and untold consequences over the rest of the twentieth century, from the Russian revolution to World War Two, with up to 85 million more deaths, and then the Iron Curtain and so much else.

This was a dramatic start to a conversation about telecoms, but I knew the answer to the question. In the first few hours of World War One the British government had sent out a cable ship (actually CS Alert, I found later) to cut all of Germany’s telegraph connections along the English Channel to Spain and the Azores, which connected from there to the US. War between Britain and Germany started at 23:00 on August 4, 1914.

By the early hours of the morning of August 5, all the cables were cut.

Why was I talking to this person? Because the US government has taken the first steps to withdraw, by late May, the licences of China Telecom, China Unicom and two CITIC subsidiaries to operate in the US. On the last Friday in April, the Federal Communications Commission (FCC) told the operators to show, within 30 days, why their licences should not be revoked.

The decision by the US government follows the May 2019 decision to reject China Mobile’s application for a licence to provide services to and from the US — a rejection that came eight years after China Mobile first applied for a licence under section 214 of the Communications Act of 1934.

The companies involved are:

• China Telecom, which has had licences since 2001 and 2007;
• China Unicom, whose licences go back to 2003 and 2004; and
• Pacific Networks and its wholly owned subsidiary, ComNet (USA), both of which are owned by CITIC Telecom International Holdings and have licences from 2001 and 2003.

Pacific Networks resells international voice and data to operators on a wholesale basis, and ComNet — formerly CM Tel (USA) — provides international termination service, global SIM card service and a number of other services.

The FCC also wants to withdraw its international signalling point codes (ISPCs) — routing codes that are assigned under signalling system No. 7 by national regulators under the authority of the ITU.

Intelligence surveillance
On what grounds? One person had seen some of the documentation — circulated among those who need to know — about action against one company. It included blanked out pages that were, said my source, attributed to the Foreign Intelligence Surveillance Act of 1978. That sets out the legal procedures in the US for gathering information about “persons engaged in espionage or international terrorism against the US on behalf of a foreign power”.

One of the people I spoke to during April pointed out that the US is well aware of how effective it can be to gather intelligence from telecoms traffic. “Read Anthony Sampson’s history of ITT,” said this person. Fortuitously, I had a copy of this 1973 book, The Sovereign State, next to my desk, and I had already re-read it earlier this year.

ITT was the first US-based telecoms multinational, which owned operators in Europe and Latin America and equipment vendors in Europe, including Standard Telecommunication Laboratories in the UK, where optical fibres were invented in the 1950s.

But in World War Two, it operated in Nazi-occupied Europe, even after the US entered the war, routing management information via neutral Switzerland. And, notoriously, it worked with the CIA in the 1970s when the US helped to bring down Salvador Allende, the democratically elected president of Chile. (ITT still exists, though it long ago moved out of telecoms, and is now entirely legal.)

Executive order
The industry had been expecting the announcement from the FCC since early April, when the president Donald Trump, issued an executive order allowing the US effectively to block any foreign telecoms company by withdrawing its section 214 licence. Capacity understands that the executive order was originally drafted when Barack Obama was president, but had been sitting in the White House since then — whether for lack of time or for lack of need is unclear.

But the move has come after several years of a White House campaign against two Chinese equipment vendors, first ZTE and then Huawei. First, ZTE paid a penalty of $1.4 billion and accepted a US lawyer to keep a watch on its activities for 10 years. ZTE had sold equipment to Iran that included US-made software and hardware, against the US embargo.

Then, in early December 2018, Canada arrested Huawei’s CFO, Meng Wanzhou, as she was arriving at Vancouver airport from Hong Kong. She is fighting an extradition action brought by the US authorities, which are charging her with activities linked to sales to Iran. This is all likely to take at least until the end of 2020 before it comes close to a resolution.

Trump finally signed the executive order in early April, giving the FCC the power to revoke licences. What the order also did was formalise an arrangement that had existed since the late 1990s: parts of US government created an informal grouping called Team Telecom that was intended to advise the White House about any intelligence threats from foreign telecoms companies.

“The FCC didn’t have any expertise in security or trade,” a former official told me.

Sometimes there was concern about a foreign carrier’s proposed move into the US, but these were usually settled via agreed mitigation arrangements — such as an agreement to keep records in the US, where they were accessible to government agencies.

But until now Team Telecom has remained hidden from public view. “It’s like Fight Club,” said one, quoting the 1999 movie. “The first rule of Fight Club is you don’t talk about Fight Club.” That also hampered Team Telecom’s role in the US: it was not taken seriously by other agencies. It could recommend, but there was no way of escalating issues.

But that changed in early April when Trump took the dusty executive order off the pile of documents on his desk and signed it. What sparked that was the fallout from the FCC’s rejection in 2019 of China Mobile’s application for a licence. If China Mobile was banned from operating in the US, why were its sister companies, especially China Telecom and China Unicom, allowed to continue? And the CITIC subsidiaries.

A spokesman for CITIC told Capacity immediately after the FCC issued its order: “We will respond within 30 days to the FCC according to the request. Pacific Networks and ComNet (USA) have always been complying strictly with the US laws and telecommunications regulatory requirements. We have been able to provide services in the US for more than 10 years, based on our solid compliance foundation.”

No comment
In the days before the FCC action, but when it was clear that something was coming, I approached a large number of people across the industry for comment. Most would talk only if they were not named; some did not even want quoting at all, though were happy to speak on background.

“I would think it’s sabre-rattling,” said one official in an international organisation: this person thought the move was carried out to strengthen the Trump White House’s hand in trade negotiations with China.

Many pointed out that most foreign-owned companies are not allowed to own infrastructure in China, so it could be seen that the US is adopting a similar position to China’s.

One of the few who would speak was Richard Sofield, a partner with the Wiley law firm in the US. He told Capacity that the FCC’s orders “represent a significant step in the US government’s efforts to push Chinese communications providers out of the US market based on national security concerns”. In the UK, Stephanie Liston, a former member of the UK regulator, Ofcom, who is now leading law firm Mishcon de Reya’s telecoms practice, said: “The growing nationalism in the US is now manifesting itself in the regulation of interconnectivity.”

Earlier in her career Liston was in the international group at MCI — now part of Verizon Business — negotiating its interconnection agreements that expanded it globally. “This step is a significant U-turn, which could have dramatic wider implications for the industry as a whole,” she said.

Sofield also worried about the potential of the FCC action to affect the whole telecoms industry. “These US government efforts will ripple through the industry as providers in the United States and around the world assess the extent of their business relationships with these, and other, Chinese companies and determine the impact that severing those relationships would have on the continuing provision of communications services.”

Others remained unwilling to talk. One senior UK government official contacted by Capacity was still assessing the FCC ruling. “I’m still catching up on these matters,” said the official.

One international telecoms carrier told Capacity: “As the situation is unclear to us, we are not a position to comment.”

Onward transit
At first sight, the rulings — if they are carried through after May 23 — do not seem to stop US carriers handing traffic destined for China to an intermediary in Asia or Europe for onward transit to China; or for Chinese operators to do likewise with calls and data heading to the US.

What they clearly will potentially do after late May is stop Chinese operators running networks in US territory — and that could mean sharing ownership of subsea cables that land in the US.

And they will stop Chinese operators from running mobile virtual networks in the United States for Chinese business people and tourists.

In the long term the move could have wider impact. Trump’s executive order refers simply to “foreign” telecoms operators, all of which need section 214 licences, whether they be from allies such as Japan and the UK, or — let’s say — more difficult countries such as China or Russia.

While the US relationship with China is particularly delicate at the moment, the US government could take action against operators from other jurisdictions.