The arrest of Meng Wanzhou, Huawei Technologies Co.’s chief financial officer, has triggered a debate in China over whether to carry on with trade talks or link the two issues and retaliate.

Conversations with seven Chinese officials across five government agencies, all of whom asked not to be identified, revealed a split between those focused on the economy and others who deal with national security. The first group saw a need to keep the two issues separate, while the second wanted to push back more forcefully against the U.S.

Officials concerned about the economy warned a collapse in trade talks would hurt China more than the Huawei arrest. Trump has threatened to raise tariffs to 25 per cent on US$200 billion worth of Chinese goods if a deal isn’t reached in 90 days. In the worst case of a 25 per cent duty on all Chinese goods, 2019 economic growth could slump about 1.5 percentage points to 5 per cent, down from 6.6 forecast for this year, according to Bloomberg Economics.

“The detention of Huawei’s CFO is not an accidental incident and will cast a shadow over the trade talks, but both sides will work hard to avert that bad influence,” said Wei Jianguo, former vice minister of commerce and now a vice chairman of the China Center for International Economic Exchanges. “The negotiation between Chinese and U.S. working groups is going smoothly, and actually much better than people outside expected.”

‘Century of Humiliation’

On the other hand, bureaucrats who were more involved with national security view things differently. In their eyes, Xi caved too much and ended up looking weak to the public. The Huawei arrest was just another tactic by the U.S. to gain even more leverage, they say, and China should fight back with measures that hurt American companies.

One official mentioned being personally angry because Huawei is a point of national pride for the Chinese people, and keeping the issue separate from trade talks would be difficult even if top leaders wanted to. Even ahead of the talks, one official invoked the Qing Dynasty associated with China’s “century of humiliation,” when it lost territories like Hong Kong to foreign powers.

Chinese officials have reason to worry about a public backlash. In the 1990s, Premier Zhu Rongji was criticized by an increasingly nationalist public after returning empty handed from trade talks with the Clinton administration. Throughout the 2000s, Chinese foreign ministry officials recalled receiving calcium tablets in the mail from angry members of the public, urging them to strengthen their backbones over perceived slights by Japan and the U.S.

‘Look Powerless’

“Ms. Meng’s arrest threatens to make China’s leadership look powerless in securing the release of not only a citizen, but a senior executive and daughter of one of China’s business icons,” said Michael Hirson, Asia director at Eurasia Group and a former U.S. Treasury Department official. “Nationalist sentiment will thus make it harder for Beijing to offer major concessions to Trump.”

Publicly, at least, China is keeping the issues separate. On Thursday, commerce ministry spokesman Gao Feng told reporters that China is implementing agreements reached with the U.S. on agriculture, autos and energy. “In the next 90 days we will work in accordance with the clear timetable and road map” to negotiate in areas of mutual benefit, he said.

Then on Friday, foreign ministry spokesman Geng Shuang dismissed concerns that China would retaliate against U.S. companies.

“China always protects the legal rights and interests of foreigners in China, but they should also abide by all Chinese laws and regulations,” Geng said.

‘Huge Gift’

It’s unclear if China will take a more fervent stance now that Xi has arrived back in Beijing. For several days after his meeting with Trump, the bureaucracy was stuck waiting for him to return, uncertain of what exactly was decided during his meeting with Trump in Argentina.

And while it’s not known if Xi was aware about Meng’s Dec. 1 arrest before it was publicly announced, much of the Chinese bureaucracy was unaware. When the news broke on Thursday in Beijing, shocked trade officials called the embassy in Canada to try and find out more details, according to one person familiar with the exchange.

As China contemplates how to respond, at least there is one silver lining: It helps China appear sincere to the world in wanting to resolve the trade war. He can say he is trying to resolve the issue but the U.S. has an entrenched strategy to cut off China’s rise as a global power -- a theme that state-run media picked up on Friday.

“The Huawei arrest gives China’s leaders a huge gift,” said Barry Naughton, a professor at the University of California in San Diego who studies China. “It makes super plausible the narrative they’ve been trying to promote all along: ‘The U.S. just can’t stand our rise, they can’t stand to lose their dominance, they can’t treat anybody like an equal.’"

--With assistance from Kevin Hamlin, Miao Han and Shawn Donnan