Chinese telecom officials say spying would undermine business

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Profits trump espionage, officials from Chinese telecom giants Huawei and ZTE told a Sept. 13 House panel, stating under oath that coding backdoors into their equipment would jeopardize their ability to conduct business.

"Huawei has not and will not jeopardize our global commercial success nor the integrity of our customers' networks for any third party or government--ever," said Huawei Senior Vice President Charles Ding during a House Intelligence Committee hearing.

"Would ZTE grant China's government access to ZTE telecom infrastructure equipment for a cyberattack? Mr. Chairman, let me answer emphatically no," said Zhu Jinyun, ZTE senior vice president for North America and Europe.

In any case, Zhu added, virtually all telecom equipment sold in the United States and in the world today contains Chinese-made components, including equipment with Western brand names. Both executives spoke to the committee through interpreters.

The House Intelligence Committee is set to release a report in the coming weeks with the conclusions of a year-long investigation into whether telecommunications firms with ties to the Chinese government pose a threat to the United States.

During the hearing, both executives said their companies have no connections to the Chinese government. Yes, said Ding in response to questions from committee chairman Rep. Mike Rogers (R-Mich.), there is a Communist Party committee within Huawei. Such a committee is a requirement under Chinese law, he said, and it does not participate in business management or decision making.

"The Chinese Communist Party and the Chinese government has no influence at all on ZTE operations," added Zhu.

Asked later by Rep. Adam Schiff (D-Calif.) about a provision in Chinese law stating that "a state security organ may inspect the electronic communication instruments and appliances and other similar equipment and installations belonging to any organization or individual," Ding said he "personally do not know clearly about such law in China."

Earlier this year, the Australian government banned Huawei from participating in a national broadband acquisition, and the Treasury Department's Committee on Foreign Investment in the United States forced the company to roll back its 2011 acquisition of assets from bankrupt Bay Area-company 3Leaf Systems.

Technically, the federal government could buy Chinese-firm telecommunications network services. Although China is not a designated country under the Trade Agreements Act, telecommunications network services are exempted from TAA regulation. The act guarantees foreign company access to the federal market for procurements worth more than a variable threshold (the most common is set by the World Trade Organization Agreement on Government Procurement and is currently $202,000) and bars it for nondesignated countries--unless a service is exempted from the TAA in the first place, which telecom services are.

Information technology equipment (rather than telecom services) does come under the auspices of the TAA, meaning that the federal government can't buy Chinese-made technology for procurements worth more than the threshold. However, the products it buys almost certainly have Chinese-made components in them, since country-of-origin under the TAA gets determined under a standard known as "substantial transformation," which holds that a product comes from the place where its components were transformed from a collection of parts into the product. Mere assembly falls short of the substantial transformation threshold, but since Chinese-made components are vital to the international supply chain, few, if any, vendors are able to eliminate them.

During the hearing, Zhu said ZTE has used third party assessors to test its products so that "equipment can be trusted no matter who the supplier is."

For more:
- go to the hearing webpage (prepared testimonies and webcast available)

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