2 China tech firms called spy suppliers

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WASHINGTON -- The House Intelligence Committee recommended Monday that U.S. companies should be blocked from carrying out mergers and acquisitions involving two Chinese telecommunications firms, saying their equipment could be used for spying in the United States.

The recommendations, the result of a yearlong investigation, also said the U.S. government should not use equipment from the companies, the giant Huawei Technologies and ZTE Inc., and that U.S. companies should find alternative suppliers as well.

A report on the inquiry described the companies as a "national security threat" to the United States, saying the committee had obtained internal documents from former Huawei employees that show it supplies services to a "cyberwarfare" unit in the People's Liberation Army. The committee said the U.S. government should go through the federal Committee on Foreign Investment to carry out its recommendations to block any business or other transactions involving the Chinese companies.

The report was presented by House Intelligence Committee chairman Mike Rogers, R-Mich., and Maryland Rep. C.A. Dutch Ruppersberger, the panel's top Democrat. It was the latest development to highlight the sensitive terrain that the United States and China are navigating as they try to build their commercial ties.

Those efforts have formed part of the political dialogue just weeks ahead of the presidential elections, as both candidates have spoken of the importance of U.S. ties with China and have pledged to act strongly on Chinese currency and trade practices damaging to U.S. business interests.

Mitt Romney, the Republican presidential candidate, has repeatedly urged a more confrontational approach to China on business issues, although he has focused his warnings more on Chinese currency market interventions than on its telecommunications firms' activities.

President Barack Obama has also taken a tougher stance on China recently. Late last month, Mr. Obama, through the Committee on Foreign Investment, ordered a Chinese firm to divest its interest in four wind-farm projects near an Oregon Navy base where drone aircraft training takes place. It was the first time a president had blocked such a deal in 22 years.

The Obama administration this month also filed a World Trade Organization case accusing China of unfairly subsidizing its auto and auto parts exports, the ninth trade action the administration has filed against China.

The report Monday included a classified annex, but several cybersecurity officials said they did not know whether the committee had found evidence that the telecommunications firms had added "backdoors" to surreptitiously gain access to the products.

In September testimony before the committee, officials of both Huawei and ZTE said alleged backdoors were actually software flaws, not intentional vulnerabilities.

Huawei has been the subject of many criticisms and security warnings for years, including by the Defense Department, and the company's U.S. expansion plans have faced resistance from Congress over questions about its ties to China's military.

Huawei denies being financed to undertake research and development for the Chinese military, and its executives have repeatedly insisted that they have nothing to hide.

In a statement released at the same time as the committee's news conference, Huawei condemned the panel's investigation and report, saying it had tried for 11 months to work with the panel, but that lawmakers had proceeded on a predetermined track anyway.

ZTE said in a statement Monday in China that while it had not yet seen the report, it had told the committee in April that it was "China's most independent, transparent, globally focused publicly traded company." The company said its equipment was "evaluated by an independent U.S. threat assessment laboratory with oversight by U.S. government agencies," and added, "Most or all U.S. telecom equipment is made in China, including that provided by Western vendors."



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