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Joint Standing Committee on Trade and Investment Growth
09/02/2018
Australia's trade system and the digital economy

LACEY, Mr Simon, Vice President, Global Government Affairs, Trade Facilitation and Market Access, Huawei Technologies Co. Ltd.

MITCHELL, Mr Jeremy, Director, Corporate & Public Affairs, Huawei Technologies Co. Ltd.

[14.07]

CHAIR: I call on representatives of Huawei Technologies. I was going to ask you how you pronounce it. Although we do not require you to give evidence under oath, this hearing is a formal proceeding of parliament. Giving false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I will now invite one or both of you for an opening statement, to be followed by some questions.

Mr Mitchell : I will open our presentation by giving a one-minute overview of who we are. As you stated, a lot of people cannot pronounce our name, let alone know exactly what we do. Huawei is the world's largest telecom infrastructure provider. We are the third largest smartphone manufacturer. We are one of China's largest privately owned companies. We are 100 per cent owned by our staff. We operate in 170 countries across the world. Last year our global revenue was US$92 billion. We have three areas of business: as I said, we have the telecom infrastructure side, which is about 70 per cent of our work; we have the handsets; and we also do what we call enterprise. We have been in Australia for 14 years. We have 700 staff, 96 per cent of which are local. We are the largest provider of wireless networks in Australia. We work with Optus and Vodafone, and we also do other work with Telstra. So we actually work with all of the major carriers in Australia. We have revenue of around A$600 million. I am going to hand over to Mr Lacey, who wrote our global white paper on digital trade. He is the expert for Huawei globally. He has come down from Shenzhen, our headquarters, but he is an Australian. He is one of the few that work up there, so that is good to have.

Mr Lacey : I actually went to school just down the road at Narrabundah College.

CHAIR: It is a small world.

Mr Lacey : I just prepared a very brief opening statement that runs for about five minutes. My hope was that it would be more back and forth question and answer, really. Let me just begin by thanking you on behalf of Huawei Technologies for giving us the opportunity to come before you this afternoon to share our views on this important topic and, in doing so, hopefully contribute to the valuable work of this committee. The focus of this inquiry is the world trade system and the digital economy. The written submission that Huawei made to this inquiry was our recent white paper on trade rules for the digital economy—a study that I authored and have now presented many times for different audiences in about half a dozen countries, including to international organisations like UNCTAD and the WTO. Our white paper represents some new thinking on these issues that we will continue to share with governments, policy makers, our industry partners and other stakeholders in the future. My understanding is that you have all had time to familiarise yourselves with the document. It is rather long—it is about 105 or 110 pages—but there is also a short version of about 24 pages that sums up our key findings and conclusions.

Let me be fairly brief here. I will just summarise four of our most important findings that are also of the greatest relevance for your work as part of this inquiry. I just want to preface these four points by giving you a brief introduction on where Huawei as a company stands on these issues and why a company like Huawei is engaged in this policy advocacy work. We as a company have come from very humble beginnings exactly 30 years ago as a very small and scrappy start-up fighting against bigger and more entrenched players for every piece of market share that we could win. Today things are quite different. We are a recognised industry leader. We are the No. 1 network equipment vendor globally. We are among the top three smartphone manufacturers. We also have a very up and coming cloud computing business. We are also very much a company that invests heavily in our own research and development. As such, we are at the forefront of technological innovation. We are one of the largest filers of patents among the Fortune 500. Today we come before you as representatives of a global ICT industry leader operating in 170 countries that also recognises the responsibilities and burdens that leadership entails. These responsibilities include engaging in thought leadership and policy advocacy for the benefit of the entire globalised ICT industry. That is why we are here today.

Let me now come back to the white paper and the four principles that we believe are the most important for the work of this committee. The first would be that we all win in a world where the internet is global, open and free since a global, open and free internet allows for the free flow of ideas and the spread of new technologies and innovation. It also goes a long way to ensuring the future unencumbered growth of the digital economy and all of the benefits this can bring mankind. The second principle is that governments still have a role. Governments are and must be the arbiters of the public policy exception. By this we mean that the role of governments as watchdog and overseer of the internet economy is both unambiguous and unchallenged. Governments must act when doing so is required to safeguard legitimate public policy interests. This goes to the very heart of this perceived paradox between the global internet and national sovereignty. We believe this is a false choice and that governments today have a very important role to play in securing the internet as a global public good. Another principle is that national security is important but cannot be used to justify every policy intervention. We must remain vigilant, but on the other hand we also cannot live in a state of constant fear looking over our shoulders. When acting to protect national security, we must ensure that this is not used as a blank cheque to justify or disguise protectionism.

Finally, I would like to state that new trade rules on the digital economy, be they on electronic commerce, technical barriers to trade, intellectual property, international regulatory cooperation or international standards like the two gentlemen before us were just speaking about, should best be agreed and adopted at the World Trade Organization. We really believe this is the place for those rules to be negotiated and enforced. This is for reasons of legitimacy as well as inclusion and so that the economic impact of these rules is felt as widely as possible and can benefit the greatest number of people. Another reason that the WTO is the right place for these rules rather than, say, in FTAs is because of the importance of the public policy exceptions. History has shown us that FTAs have a very weak record on dispute settlement, whereas the dispute settlement system of the WTO is the jewel in the crown. Whenever governments have invoked public policy exceptions to justify disguised restrictions on international trade, it has been in the context of the dispute settlement that we have been able to stop public policy exceptions from being abused. Those would be the most important points from the white paper. I am happy to elaborate on any questions you may have.

CHAIR: Could you give the committee some examples of what could in the worst-case scenario affect our national security?

Mr Lacey : Of course, communications infrastructure belongs to critical infrastructure. But there have been cases of abuses of the national security exception in international trade, some of which are actually quite laughable and some of which are actually being adjudicated now. When we see what the United Arab Emirates and in fact the entire Gulf Cooperation Council did against Qatar last year—basically, they imposed a boycott on all goods and services, so Qatar went to the WTO and sued these countries. They invoked the national security exception. Now we are waiting to see whether we are actually going to have our first WTO panel on this. A more laughable example is that, in the 1970s, when the Swedish footwear industry had come under threat from cheap imports from southern Europe and elsewhere, because a Swedish footwear company made army boots for the Swedish army, the Swedish government invoked a national security exception to protect its national footwear industry. Members of the GATT at the time and contracting parties felt this was a bit laughable. There are many instances where we can see national security being abused. Very recently the Trump immigration ban on Muslim countries was justified under national security. It was a federal circuit court in New York that said you cannot use national security as some talismanic invocation to justify every policy intervention. There have to be limits to what is reasonable. Those would be some examples.

Mr Mitchell : You are saying what the threats could be to Australia?

CHAIR: Yes, to Australia.

Mr Mitchell : On the extreme level, and we have seen it happen, countries have shut down other countries' networks. Obviously, from our point of view as network builders, we have always believed that you take into consideration all aspects of threats. Those threats can be from other nationals, from organised crime or from the backroom hacker. The threats are real. The threats are there. They are happening on a daily basis. You have to build your networks and do the security arrangements for that. I say, too, that these are global issues and they have to be handled in a global way through things like the WTO and other organisations. But also we no longer have—for example, we are a Chinese company of origin but our equipment is made all around the world. It may be assembled in Cambodia or in Vietnam with parts from Europe and parts from Japan. That is the same for all of our competitors. So we now live in a global supply chain where the country of origin of the company does not match the actual products they are selling. For our products, they come 30 per cent from Asia, 30 per cent from Europe and 30 per cent from North America.

Mr Lacey : The US ITC actually did a study over the last few years on global ICT supply chains. It is quite interesting research.

Mr HART: I found your white paper really interesting. Let us play a little game. Let us assume that your white paper represents orthodoxy and it becomes the position that is adopted not just here but elsewhere. Where are the main points of contention within your white paper? Where are the key areas of conflict? You have presented this to a number of other fora. Which are the points that are most up for negotiation and contention?

Mr Lacey : This is fairly orthodox. When we were looking at coming out with a white paper, because we operate in so many different markets and we have customers that themselves come to the table with different interests, whether they are carriers or OTT providers, we had to find positions that we could defend without putting people's noses out of joint too egregiously. So we turned to APEC, OECD and the G20. We particularly turned to the fora where both America and China sit, which was APEC and the G20. We focused on consensus language that emerged from those fora. China is not in the OECD, but everybody recognises the OECD as a global best practices club. If you are looking for the three areas of the greatest contention, I would say that in the e-commerce chapter of the TPP you have a whole bunch of articles, some of which are not contentious: that we should promote paperless trade, we should promote greater cooperation on banning spam and those sorts of things, we should promote greater interoperability of privacy regimes—

Mr HART: Open standards.

Mr Lacey : Yes—things that countries can agree on. Where the rubber hits the road is where the agreement tries to impose real constraints on what governments can do. There are three provisions, I would say. The first is free flow of data. The other one is data localisation. The third is the mandatory disclosure of source code. These are three provisions that actually try to tell governments, 'You can't do this', or 'You can do it but only subject to certain exceptions'. Those are the most contentious provisions, I think. Now, as we see RCEP—the original comprehensive economic partnerships—well on the way to negotiating an agreement now, they also are negotiating an e-commerce chapter which was introduced into the negotiations by Japan and which mirrors very closely the e-commerce chapter we see in the TPP. We are all kind of holding our breath to see whether or not China and India will also go along with this idea of free flow of data. I think everybody agrees that free flow of data is a good thing. I think different countries have reservations on how free it should be and how far the limits of censorship should be. I think there is a lot of disagreement about data localisation—when data localisation should happen. Both India and China practise data localisation, for example. So we are waiting to see whether we can get some consensus in RCEP that would look the same as what we have achieved in the TPP. Remember, the TPP brings together countries as liberal as Australia and New Zealand and as restrictive as, say, Vietnam, if you like. Vietnam intervenes quite heavily in internet governance as well. But they still managed to sign the TPP.

Mr HART: At a more practical level, have you identified any unintended consequences of regulatory impediments to the digital economy in Australia? In other words, are there instances where Australia has transgressed the orthodoxy that you are talking about in your paper?

Mr Lacey : Not really. Australia is part of the OECD. Australia has been quite a vocal advocate or at least supportive of these rules. Australia had some reservations about free flow of data, so the language we see in the TPP—in the TPP provision in the e-commerce chapter which says free flow of data 'for business purposes', 'for business purposes' was introduced at the insistence of Australian negotiators. It was out of privacy concerns. We are fairly orthodox. I think where you see unintended consequences is in other markets, particularly smaller markets, that try to enforce data localisation. When India and China enforce data localisation I do not think anyone really cares because those markets are so big and they were going to put data centres in those markets anyway. But when you get a country like Turkey—Turkey introduced a data localisation requirement on any financial services data that was generated on Turkish citizens a few years ago as part of I think it was a banking licence for Paypal. Paypal just said, 'Look, it's not worth us building data centres in Turkey. We are going to pull out of the Turkish market. It's just not big enough'. So that is an unintended consequence. It is not an Australian example because we are quite orthodox here.

Mr HART: What is your experience, as a large multinational organisation, of Australia's expertise—in particular, our trade officials' expertise—in dealing with the digital economy? Are they sufficiently technically literate with the issues that you explore in your white paper?

Mr Lacey : It is very interesting. Our trade negotiators have for many decades punched well above their weight in Geneva. It is just because you show up at these meetings and, if you have something to say and you have prepared your position, you carry the day. Our guys have always been very organised. That is just in general. On those issues that we have cared most about, like agriculture, our positions have also carried the day—like what we did with the Cairns Group in the Uruguay Round. When it comes to digital, I think we probably went through this baptism by fire during the TPP round, where we found that the American negotiators had shown up with fairly clearly formulated positions and we really needed to figure out very quickly whether there was any reason from our industry why we could not go along with these positions. But I think everybody was in that boat. I was in Washington DC in 2012. This was a hot topic then because Google had just circulated a white paper on the free flow of data and we were all speculating on whether or not Google was going to bring a WTO case against China about the great firewall. Ultimately, it did not end up happening. There was a lot of talk. Someone said something quite interesting: that at USTR there was only one guy—they only had one person who had any expertise in the digital economy when Google approached them. This was in 2011. So even USTR went through a very steep learning curve. They had a lot of people who knew agriculture. USTR was captured by the pharmaceutical lobby a long time ago, so they had a lot of guys who knew the ins and outs of—

Mr HART: IT protection.

Mr Lacey : international patent protection, but they did not have anybody on digital because American internet companies had only become very big recently. They also only started running into serious trade barriers around 2010, when governments started intervening.

Mr HART: You have obviously got specialist expertise. As a 'consumer' and interacting with the Australian government, to what extent do you see fragmentation of information across departments? Do you see anything that is remotely coherent or is it, as I suspect, that there is fragmentation of information?

Mr Mitchell : On trading issues or on security issues?

Mr HART: Generally the digital economy, whether it is security or otherwise.

Mr Mitchell : In our interactions I think in the last, say, three or four years there has been a much better coordination of government. They have been around certain hubs. In cybersecurity, for example, there has been a greatly improved coordination between government departments. We have much experience of having to go from department to department to talk about cybersecurity. I think the establishment of the critical infrastructure group has been very good. We have found from our point of view in the telecommunications industry that it has been a good central point for us to go to on these areas, and it is the whole of government that we can talk to through them. So we have been very impressed with the way that has been set up and is being done. I think this has been built on over many years of getting to this point. For us, from Huawei Australia, we do not really get involved in much on the trade issues. To be honest, we do not have many trade issues for Huawei in Australia at all. It is more in the jurisdiction in the global sense.

Mr Lacey : I think as a consumer, though, one point I would like to mention—and this is a drum I bang wherever I go—that what I have noticed living in China and where they have really advanced is mobile payments. This is technology that has been around for at least 10 years. I moved to Singapore in 2006 and there was a scheme where you could pay with your fingerprint in a bunch of stores as long as you register for the program. But your fingerprint was linked to your card. In Australia, as in most of the advanced countries, we have this paywave scheme, which is very convenient—you just wave your card near an NFC reader. But we do not have mobile payments in any sort of way. We have Apple Pay, but you have to have an iPhone for that. So what happens to everybody else, who do not have iPhones? One thing where the developed world or the Western world, if you like, has really fallen behind is mobile payments. I have not really figured out why, because it is not a technology problem. The technology is there. I suspect that there is a bit of a path dependence problem. We are used to carrying around cards and we are used to carrying around our wallets. I can tell you that when I am back in China I go for weeks without touching my wallet. My wallet stays in my bag. The only thing I need to pay anything is my phone.

Mr HART: I think there are changes in the financial system which will enable instant payments. That is just being introduced at the moment. In other words, rather than having an account number, you can pay to a mobile phone. That will identify you as the recipient of money—

Mr Lacey : That sort of thing cannot go fast enough. That is just really convenient as a consumer.

Mr HART: Essentially, that is literally in the process of rolling out now. So that will be independent of platform.

Mr Lacey : It needs the cooperation of the central bank, usually, to be able to do that.

CHAIR: When we are at the next APEC meeting in Port Moresby—

Mr Lacey : Papua New Guinea is chair next year.

CHAIR: it will be practically incumbent upon me, because they are still back on getting the kina and burying it in the ground type of thing. It is a big challenge up there for ANZ bank and Westpac to try to get them to keep the money in the bank because of the robberies and violence up there. They know when your payday is and you get cash—look out.

Mr HART: What about net neutrality and recent changes in the United States?

Mr Lacey : Net neutrality is actually not a trade issue. Technology neutrality is. Interoperability of systems is. Net neutrality is not a trade issue. To be honest, it is an issue we have struggled to get our heads around at the company. I have some colleagues who work on this. Because we have different customers, we have different positions. We have a carrier business that is very much in favour of doing away with net neutrality and then we have OTT customers who strenuously insist that net neutrality is some sort of holy grail. I tend to think of this in the same way as airline travel. In airline travel you can pay business or you can pay first class and it is a very different experience to economy. I think as long as a minimum level of service is guaranteed by the providers—a minimum level of speed and a minimum level of low latency—it is like an airplane. If I fly economy then the only thing I really expect is to arrive safely at my destination and on time. All of the bells and whistles are reserved for those, like Jeremy, who fly business class more often than I do.

Mr HART: Let us unpack that.

Mr Lacey : It is not an issue that the company has an official position on.

Mr HART: Encryption as a service, for example, running on top of your basic net traffic or—you are a technology vendor, so you sell equipment. Bits of equipment that provide encryption services are obviously within your business interest. Exploring that further, that side of your business would be basically careless about net neutrality because you could sell an additional service which provides for endpoint-to-endpoint encryption as an add-on.

Mr Lacey : Encryption as a trade issue has been done with under the TPP. There is an ICT annex to the TBT chapter—the technical barriers to trade chapter. I think that came at the behest of companies like WhatsApp that use end-to-end encryption owned by Facebook and that really wanted to ensure they could provide services in all of the countries they operate in without actually having being forced to hand over their encryption keys or being forced to use an encryption technology developed domestically. That is the trade angle side of it. As far as the company—I am not sure. This is the first time I am hearing the business case for encryption being lumped together with net neutrality, to be honest.

Mr Mitchell : The company does not have an official position. But, from the carrier side of our business, they understand that the billions of dollars that telecommunications companies are spending on networks—they have just spent billions of dollars doing the 4G networks and they are now about to undertake billions of dollars in spending on 5G networks. Then companies like over-the-top companies are essentially using those networks as the fundamental basis of delivery of their businesses. So I think that is the concern from our customers on that point. But, as you said, we try to stay out of that because we are a large company with a large number of businesses, and we will upset someone—

Mr HART: We had a presentation from one of your competitors as to the likely future of 5G in real-time telemetry and real-time remote control of the equipment so that you are using feedback in real time. That was an interesting potential for the future.

Mr Lacey : What is very interesting about the American example, though, is that when Agit Pai, who used to be a lawyer for Verizon, became chairman of the FCC he immediately started undoing all of this net neutrality regulation that had been enacted under the Obama presidency, and now that is being challenged in the courts. It is going to take years until it gets sorted out, even in the US.

CHAIR: With your operations over 170 countries, how do you go about staffing those various locations? Is it a bit like the Qantas pilots and China or—

Mr Mitchell : We have expats that come out of China and then we have a localisation strategy. In countries like Australia we have 96 per cent locals. That is generally across the board. I think the global average—

Mr Lacey : It is 90 plus per cent, isn't it?

Mr Mitchell : Yes, over 90 per cent local staff in those 170 countries. It is just that when you are doing business in each country you need to know the norms and culture of those countries. We are selling universal equipment, but it is the sales of that equipment in each of those countries that is important. So we have a localisation strategy that we do. But we have expats that actually come—our CEO. And that is part of the way of doing global business in a sense at Huawei. It is easier to have an expat who can then deal with R&D issue that we need or supply issues from headquarters.

CHAIR: Thank you very much for coming today. You will be sent a transcript of the evidence you have given us. From my committee, thank you very much, gentlemen.

Committee adjourned at 14 : 37