The United States has stepped up its trade war against China, essentially banning American companies from selling to or buying from Huawei, the Chinese telecommunications giant. The move is a potentially crippling blow to Huawei, although the company can mitigate some of the impact in the short term. More important than the damage to Huawei, however, is the message it sends to other businesses, along with U.S. allies and partners: Washington is convinced that Huawei is a dangerous entity, and countries and companies that continue to work with it risk jeopardizing their relations with the U.S.
The U.S. suspects that Huawei, the largest telecommunications equipment manufacturer in the world since 2012, the second-largest manufacturer of smartphones in the world since 2018 and the third-largest purchaser of semiconductors, is a security threat. Critics charge that the company is too close to the Chinese government, and that the use of Huawei equipment in critical national telecommunications systems gives Beijing a window into the contents of those communications and a kill switch that can be deployed in the event of a crisis or confrontation. Huawei denies the charges.
The Trump administration has been ratcheting up pressure on Huawei, warning U.S. security partners that incorporating its equipment in their national security communications networks will jeopardize ties with the U.S. In response, several U.S. security partners, including Japan, have banned the company from their fifth-generation (5G) telecommunications networks.
This week, the U.S. announced that it will put Huawei and its 70 affiliated companies on the Department of Commerce Entity List, obliging U.S. companies that want to sell technology to Huawei to first obtain a license from the government. The move is not an outright ban on sales, but it comes close. At the same time, President Donald Trump signed an executive order declaring that the U.S. telecommunications sector is facing a “national emergency,” a move that gives the Commerce Department the power to “prohibit transactions posing an unacceptable risk” to national security.
The move is a real blow to Huawei. The company has estimated that it spends about 14 percent of its annual procurement budget — one dollar out of every seven — on components from U.S. companies, with purchases spanning the entire range of its products. The companies that sell to Huawei are not yet sure of the impact of the decision, but markets have rendered their verdict: Several companies that are large suppliers to the Chinese giant saw their share prices tumble, with some posting losses as great as 21 percent. Drops were also evident in Seoul, where the prices of Samsung and SK Hynix also fell.
Japanese firms are being affected. The share price of Murata Manufacturing, a major supplier of capacitors for smartphones, dropped more than 5 percent. Other Japanese companies in the Huawei supply chain, such as Sony, are still assessing the impact of the U.S. decision.
Huawei anticipated the U.S. move and began a half year ago to stockpile critical parts and components, in some cases amassing a year’s worth of supplies. The company has also begun to expand the number of certified suppliers in an attempt to reduce dependence on U.S. manufacturers. It is not clear how the ban will affect companies that operate outside the U.S., but most experts believe that U.S. technology can be controlled, regardless of who the actual manufacturer is. Some experts reckon that foreign companies relying on U.S. firms for 25 percent or more of their components probably would be required to disclose customers, which is a first step toward limiting their sales.
The company is also stepping up development of its own components. Ironically, an “indigenization” strategy is preferred by the Chinese government. It reduces the vulnerability of Chinese businesses to outside pressure and creates more advanced technologies at home. From this perspective, the U.S. trade war validates Chinese concerns and promotes its desired policies.
China feels besieged and is retaliating with tariffs of its own. In addition, it has its own cybersecurity laws that, while the subject of much less attention, have the potential to be as disruptive and invasive as U.S. decisions. Some foreign companies have already reduced operations in China to avoid compromising important information or exposing themselves to legal risk.
Coming on the heels of Trump’s decision to increase tariffs on Chinese products following the failure to reach a trade agreement last week, the likelihood of a real trade war is increasing. The impact of this war will be far-reaching. Huawei is ubiquitous and both the U.S. and China have shown no hesitation in demonstrating the downside of ignoring their concerns. Companies are already adjusting to avoid being penalized as a high-technology dividing line descends on the region. This showdown is just beginning. It promises to be a rough ride.