on geopolitics

New Huawei Restrictions Turn Up the Heat on the U.S-China Tech Cold War

Matthew Bey
Senior Global Analyst, Stratfor
8 MINS READMay 17, 2019 | 09:30 GMT
The Huawei logo is displayed at the annual VivaTech conference in Paris on May 16, 2019.

Huawei Technologies has come to symbolize China's tech rise. While the United States and China may eventually come to an agreement on their trade war, their tech war will endure far beyond the Trump administration.

  • U.S. President Donald Trump's recent executive order prevents U.S. 5G infrastructure from using Huawei equipment and also may be applied to many other types of tech equipment, given its expansive language.
  • Though it is receiving less press coverage than the executive order, the U.S. Commerce Department's move to add Huawei to its Entity List, which requires U.S. exporters to obtain approval before selling to companies on it, is actually the largest salvo yet against China's tech sector.
  • The Commerce Department's designation targets suppliers and could fragment important tech supply chains.
  • Taken together, the two U.S. decisions serve as a reminder that the U.S.-China tech war will endure far beyond the trade war and the Trump administration.

In its tech war with China, the United States has launched two major attacks aimed at China and its most globally competitive tech company, Huawei Technologies. First, on May 15 U.S. President Donald Trump signed an executive order giving the U.S. Commerce Department the authority to block certain transactions involving information and communications technologies developed, designed or manufactured by companies subject to the jurisdiction of a foreign adversary. While the order did not explicitly mention China and Huawei, its intention is clear: to pave the way for the United States to block Huawei from its 5G networks and other critical infrastructure. One the same day, the U.S. Commerce Department announced that it was adding Huawei and 70 of its affiliates to its Entity List, meaning any U.S. company that wants to export technology, services or products to Huawei will need a special license from the Commerce Department to do so.

Both decisions will damage Huawei and China's economy — especially if the United States chooses to enforce them strictly. But even though the executive order is gaining most of the media attention, the bigger danger to Huawei and China's tech sector at large is the Commerce Department designation, which could drive many U.S. suppliers — on which Huawei and other tech companies are particularly reliant — to stop working with China to avoid navigating complicated regulations. And these U.S. attempts to disrupt supply chains will fuel China's nationalist drive to develop more domestic tech equipment, further broadening the scope of the ongoing U.S.-China tech war.

The Big Picture

The United States and China are in the middle of a tech Cold War, and Huawei is a company that sits in the center of the United States' crosshairs. As perhaps China's largest, most innovative and globally competitive tech firm, it has come to symbolize China's tech rise.

An Expansive Executive Order

Trump's executive order is extremely broad. It allows the Commerce Department to block transactions with Chinese companies — including Huawei — that could pose the risk of sabotage to U.S. telecommunications infrastructure, as well as those that could pose "an unacceptable risk to the national security of the United States or the security and safety of United States persons" or "an undue risk of catastrophic effects on the security [...] critical infrastructure or the digital economy of the United States." The expansive nature is even similar to China's own powerful cybersecurity law, which the United States has accused of being vague and far-reaching.

The breadth of Trump's order means it could be used to block almost any equipment produced by a Chinese entity that is used in U.S. information technology infrastructure — not just 5G networks. It will be critical to watch the Commerce Department's interpretations of the executive order as it begins issuing guidelines and regulations, which technically could end up covering tech equipment as small as home routers and switches. The Commerce Department has a 150-day deadline to issue those guidelines, meaning they will come between now and Oct. 12.

A Mess for Huawei and Its Suppliers

The executive order puts even stricter limits on Huawei's already limited ability to sell to the United States, but since the tech company's U.S. sales are a relatively small portion of its overall profit, that move actually presents much fewer complications for the company than the decision to place Huawei on the Commerce Department's Entity List. The latter action hits Huawei's relationship with the United States where it will hurt the most: the tech company's suppliers. Huawei is one of the world's most competitive technology companies when it comes to building 5G network gear, building smartphones and even designing certain chips — but it depends heavily on the tech sector's global supply chains, which invariably involve a lot of U.S. equipment, technology and knowledge. In fact, when Huawei released a list of its 92 top suppliers in November 2018, 33 of those suppliers were American companies.

A list of Huawei's key suppliers of smartphone and computer parts.

The many possible results of the United States placing Huawei on the Entity List are creating uncertainty for companies involved in the tech sector. The move may be one more step toward an extreme scenario in which it tries to block Huawei from accessing U.S. technology and components in a wide range of products. Washington did something similar in 2018, when the Commerce Department temporarily denied export privileges to another Chinese technology company, ZTE. However, the Commerce Department can choose to be flexible in allowing deals to go through to minimize the risk of Chinese retaliation and subsequent damage to U.S. companies operating in China, though it will not be an easy process. Finally, in conjunction with one of these outcomes, the Commerce Department could also try to exert leverage on Huawei in its ongoing investigations and criminal cases involving potential violations of U.S. sanctions, which is one of the legal justifications for placing Huawei on the Entity List.

Nevertheless, even if the Commerce Department is flexible in its permissions, the new designation will be a headache for suppliers. Large U.S. companies, such as Qualcomm, employ armies of lawyers to navigate complicated U.S. export control laws, but small- and medium-sized enterprises in the United States may choose not to work with Huawei to avoid the complications. Moreover, the export controls include deemed exports, which limits and/or prohibits any collaboration between Huawei and U.S. entities, such as its Silicon Valley research and development subsidiary FutureWei — even for research purposes. Already, U.S. universities have begun downsizing collaboration projects with Huawei. Beyond the United States, foreign companies are likely to find themselves caught in between the United States and Huawei and possibly forced not to sell products containing American-made technology or components to Huawei.

China's Complicated Options for Responding

The moves against Huawei and China's tech sector come during a strenuous period in U.S.-China trade talks. Washington has given Beijing a four-week notice to reach a deal before the United States places additional tariffs on effectively all remaining imports from China. This puts Beijing in a complicated spot. Typically, China responds to foreign actions against its companies by selectively upping pressure on the respective country's China-residing companies and citizens. For example, China has responded strongly to Canada's role in detaining Huawei's chief financial officer at the behest of the United States by increasing arrests of Canadian citizens and employing de facto import bans on certain goods.

Up to this point, China has hoped to succeed in making a deal on trade and has thus avoided doing anything to blow up the process. But that restraint is unlikely to last forever.

But when it comes to handling the United States' treatment of Huawei and other tech companies during its trade war with the United States, Beijing has refrained from tit-for-tat moves to cut American companies out of the Chinese market. Up to this point, China has hoped to succeed in making a deal on trade and has thus avoided doing anything to blow up the process. But that restraint is unlikely to last forever. If the U.S.-China trade negotiations don't result in a deal and all of China's goods are subject to additional U.S. tariffs, Beijing may have no choice but to increase pressure on the United States and respond in kind. Indeed, in recent weeks China's state media has ramped up nationalist sentiment, raising the possibility that Beijing may be closer to acting against U.S. assets or citizens in China.

The Big Question: To What End?

Ultimately, however, even if the United States and China do resolve their trade war, the battle for economic and tech supremacy between the world's two largest economies will drag on.

In the global tech world, the looming question is just how far the United States (and China) will go to try to separate a deeply globalized sector that boasts long, complicated supply chains. The United States will certainly consider issuing new regulations that aim to limit the amount of sensitive U.S. technology that makes its way to China and helps Chinese companies — indeed, it's still rolling out new export control rules on emerging technologies — but Washington cannot unravel the dense network of the global tech sector on its own.

A U.S. campaign to try to cut off China's access to U.S. technology and products will only force China to increase its own nationalist stance regarding technology development. It will drive Beijing to ramp up support for companies in the Chinese tech sector and to improve the country's semiconductor production capabilities through initiatives like the Made in China 2025 plan, which the United States wants China to stop as a part of its trade war. China will also try to ensure that Chinese-led and -developed standards in the tech sector are adopted worldwide so that Chinese companies can sell their products in foreign markets without fear of the United States claiming patent infringement.

Many tech suppliers and global economies consider China the most important future growth market for technology since the developed world is essentially saturated. Suppliers in Japan, South Korea, Taiwan, Vietnam and the rest of the world thus have a large economic incentive to not completely cut off economic relationships with China and its tech sector. Instead of cutting off ties to China, they will need to balance between China and the United States. Because of this, foreign companies and countries will find themselves needing to navigate a growing labyrinth of overlapping and contradictory export control rules and regulations. These rules and regulations, as well as the physical supply chains that bind them together, will be difficult to unravel, having been built up over years of globalization. But now the United States is trying to fragment globalization and it may start with Huawei.

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