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It’s not just Huawei. Trump’s new tech sector order could ripple through global supply chains.

How will this affect U.S. companies?

- May 18, 2019

The gloves are coming off against Chinese tech giant Huawei. The Trump administration took two major steps on Wednesday to address long-standing U.S. government concerns about national security and information technology infrastructure from China.

The timing and content of the announcements make it less likely the United States and China will soon reach a trade and economic agreement. The potentially devastating effects on Huawei in particular could create ripple effects throughout global technology supply chains and hasten any potential “decoupling” between Chinese and U.S. tech ecosystems.

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The U.S. government just claimed far-reaching powers over the tech sector

In the first of two major announcements Wednesday, the administration released an “Executive Order on Securing the Information and Communications Technology (ICT) and Services Supply Chain.” While many analysts consider this primarily a move to hem in Huawei, the broadly framed order gives the secretary of commerce and other officials extraordinary new powers over tech markets.

The U.S. government now can block or require conditions for transactions involving ICT products or services even tenuously linked to a “foreign adversary” — a category the executive order defines flexibly as a country, company or person “engaged in a long-term pattern or serious instances of conduct significantly adverse to” national security or to security and safety of U.S. citizens or businesses.

Here’s what this means: The U.S. government is charged with stepping in to block or manage any transactions it deems as linked to a “foreign adversary” and overly risky for critical infrastructure, national security or the “digital economy.” If these terms seem vague, that’s because they are.

The executive order leaves it to the Commerce Department and other officials to identify “foreign adversaries” and sensitive transactions. Thus it does not name China or Huawei specifically — but the language largely parallels years of U.S. government warnings about the potential for Huawei equipment to be used for spying or sabotage if installed in sensitive U.S. networks.

Public warnings date back to a 2012 House Intelligence Committee report that urged against using equipment from Huawei or the smaller Chinese firm ZTE. With this week’s order, the U.S. government is fully empowered to block U.S. companies from using Huawei equipment just as work begins on next-generation 5G wireless networks around the world.

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Selling U.S. components to Huawei will be banned without a special license

The second U.S. move, also on Wednesday, was the Commerce Department’s announcement that it would add Huawei to the government’s “entities list,” potentially halting the company’s access to U.S. suppliers.

Citing Huawei’s January indictment for allegedly violating U.S. sanctions on Iran, the government notice said U.S. companies will only be allowed to sell products to Huawei with a license, and license applications will start from the “presumption of denial.”

If the government were to deny all Huawei-related licenses, the fallout could be catastrophic for many of the company’s product lines, which range from infrastructure-level network gear to smartphones. Here’s why: Many of these products use computer chips or other specialized components from U.S. companies, some of which would be hard or impossible to replace with non-U. S. alternatives.

When the government last year imposed similar measures against ZTE, the loss of U.S. suppliers led the company to announce a stop to “major business operations.” Only after President Trump intervened to reverse that order was ZTE saved from what would likely have been a collapse.

While Huawei may have greater ability to withstand shocks than ZTE, losing access to U.S. suppliers would be a much larger hit than simply losing out on already-slim sales to the United States.

China’s ZTE has long been on Washington’s radar, for quite a few reasons.

There are consequential choices ahead

When it comes to the broad new regulatory powers of the executive order, the government has 150 days to develop more specific rules for implementation. Officials could structure their efforts in a targeted and transparent way — or they could give themselves broad and opaque authorities. One Department of Homeland Security official reportedly said the government would look broadly at risks, but “I’m hoping we’ll be able to narrow.” Businesses and interest groups will be sure to make their voices heard.

In the case of Huawei’s new life on the entities list, the U.S. government could be generous in issuing licenses to continue sales, or it could effectively block the company from all U.S. suppliers, cutting into the revenue of U.S. companies. Regardless, the uncertainty will encourage Huawei and other Chinese companies to seek alternative suppliers at home or anywhere else U.S. bans would not apply.

How U.S. officials make these choices will help answer several questions:

1. How fast and how hard will U.S. supplier limitations hit Huawei? The Chinese company has reportedly stockpiled several months to a year’s worth of some crucial components, anticipating this potential outcome. And Huawei’s subsidiary HiSilicon is one of China’s leading developers of semiconductors, though it lags behind the global leaders Huawei may need to replace. Time will reveal any real pressure points.

2. Which U.S. companies stand to lose out, and how badly? Big names such as Qualcomm, Seagate and Intel are among Huawei’s top U.S. suppliers, by revenue. But the smaller optical technology company NeoPhotonics, which pulls in 47 percent of its revenue from Huawei sales, according to Reuters data, could be in particular jeopardy.

3. How will this ripple through global telecom providers? One potential goal of the broader U.S. campaign against Huawei could be to undermine confidence in the company’s long-term viability. Huawei is among the global leaders in 5G equipment. But continued services and upgrades are crucial for network providers, so extra caution among customers worldwide could slow wireless upgrades overall.

4. How will this impact the U.S.-China economic divide? A deal many analysts believed was imminent reportedly fell through last week over China’s refusal to commit to revising a number of domestic laws. The decision to ratchet up the anti-Huawei campaign at this particular moment could draw retaliation against U.S. interests — and it risks driving the two sides further apart, while pushing any trade deal further into the future.

Indeed, if the two sides move much further down the path of antagonism, there may be no deal at all. Then again, just as the Trump administration stepped back from the brink with ZTE, it could change course here.

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Graham Webster (@gwbstr) is a fellow and coordinating editor of DigiChina at New America.