Gunning for Huawei could backfire on Donald Trump
This is a high-risk game the US is playing and China is in no mood to be bullied and its retaliation might hurt the US even more
The interconnected nature (and vulnerability) of the global trading system was dramatically demonstrated with the US commerce department’s announcement on May 15 that US companies would need permission — in the form of a special licence — to do business with Chinese firm Huawei, the world’s second-largest smartphone maker and the largest manufacturer of telecoms equipment.
The US announcement amounts to an export ban of American technology to Huawei.
The US subsequently qualified its announcement by allowing firms to supply Huawei for another three months, but for existing products only. No new sales are permitted. And that is where the effect could be most severe, because of the effect on Huawei’s future revenue.
The low prices of Huawei's products are suspected to be a result of state subsidies intended to undercut other 5G equipment manufacturers.
The US ban soon started to bite. Google announced it would stop supplying components of its Android mobile operating system to Huawei. Several US chipmakers have also ceased sales. Other non-US companies are equally important, such as chipmakers elsewhere. An effective ban will require Washington to exert pressure on them too.
How long will this battle last? Huawei issued statements about stockpiling crucial components and working on plans to become less reliant on US technology. Others are more sceptical. Without Google’s cooperation, sales of Huawei smartphones in Europe, Huawei’s second-biggest market, are also likely to suffer. The supply of software required for its telecom networks could also dry up. Huawei is developing replacements, but that will take time.
The US administration has justified its decision by invoking a “risk to national security”. US officials have been warning for some time that Huawei’s products open the door for spying, an allegation denied by Huawei. To make the US ban an effective instrument, others must also be convinced not to deal with the Chinese firm.
Matters may be more complex. The US has long suspected that Huawei benefits in other ways from its close ties with the Chinese government. The low prices of its products are suspected to be a result of state subsidies intended to undercut other 5G equipment manufacturers. This may explain why President Donald Trump has subsequently hinted that there may still be a solution as part of a bigger deal on the US–China trade war. Earlier in May, the US increased tariffs on $200bn worth of Chinese imports from 10% to 25% after the two sides failed to reach a deal in their trade-in-goods battle.
The Trump administration had earlier used the same approach against another Chinese smartphone manufacturer, ZTE Corp, following a ban on the sale of various components for illegally shipping goods to Iran. He later revoked the order against a fine of $1.3bn and lower tariffs by China on US agricultural products.
Huawei plays in a bigger league. It is China’s biggest high-tech company and is seen as a national champion. It also holds many crucial patents on superfast 5G mobile networks and is the world’s largest manufacturer of telecoms equipment. The stakes are higher. Even if the US ban is lifted in exchange for trade concessions, a return to business as usual seems unlikely. Trust in American technology firms has been eroded.
Trump’s real strategy (to the extent that there is a final one) is not yet clear, made more ambiguous by the fact that he seems to be in re-election mode already. The battle with Beijing is a useful electioneering plank. What better evidence of putting “America first” than scoring against China and Chinese firms?
But this is a high-risk game that could backfire. China is in no mood to be bullied, and has warned it may retaliate by banning the export of rare earths, a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment. China accounted for 80% of the US imports of rare-earth minerals between 2014 and 2017. They were excluded from recent tariff hikes by the US, along with some other critical Chinese minerals.
The fact that there are no efforts yet to invoke the World Trade Organisation system to resolve the latest round of US–China tensions is an indication of how far the behaviour of the big players has drifted towards a contest of power. No rules-based solution is being mentioned; Trump is clearly no fan of the rules-based game. The multilateral trade system is already under severe strain. The latest developments will be more bad news in Geneva.
• Erasmus is an associate at the Trade Law Centre.