US-China Trade War

In an earlier set of posts, I discussed U.S. laws and regulations to a) restrict technology transfers from US companies to Chinese companies (see New Restrictions on High Tech Technology Transfers to China and b) to prevent Chinese companies from investing in U.S. technology companies. See New CFIUS Rules Shut Down Chinese Investment in U.S. Technology. In those posts, I noted that the new rules are not intended to limit the right of U.S. companies to sell technology based products to Chinese companies.

Yesterday, however, the U.S. Congress proposed extending the prohibition to include sales of technology products to Chinese companies. See U.S. lawmakers introduce bipartisan bills targeting China’s Huawei and ZTE. The initial targets are Huawei and ZTE. The new legislation has been introduced by a bipartisan group from both the Senate and the House: Senator Tom Cotton (R-Arkansas), Senator Chris Van Hollen (D-Maryland) and Representatives Mike Gallagher (R-Wisconsin), Ruben Gallego (D-Arizona). The bill is titled the Telecommunications Denial Order Enforcement Act and its purpose is to direct President Trump to impose denial orders banning the export of U.S. parts and components to Chinese telecommunications companies in violation of U.S. export control or sanctions laws.” In other words no sales to Huawei or to ZTE.

Senator Cotton focused on Huawei:”Huawei is effectively an intelligence-gathering arm of the Chinese Communist Party whose founder and CEO was an engineer for the People’s Liberation Army. It’s imperative we take decisive action to protect U.S. interests and enforce our laws. If Chinese telecom companies like Huawei violate our sanctions or export control laws, they should receive nothing less than the death penalty-which this denial order would provide.”

Senator Van Hollen expanded to include ZTE: “Huawei and ZTE are two sides of the same coin. Both companies have repeatedly violated U.S. laws, represent a significant risk to American national security interests, and need to be held accountable. Moving forward, we must combat China’s theft of advanced U.S. technology and their brazen violation of U.S. law.”

If enacted, this prohibition on sale of parts and components will deal a crippling blow to both Huawei and ZTE. We have already seen how ZTE was severely impacted by an earlier ban on such sales and of how Congress was so critical of President Trump’s decision to back down on those restrictions. This bill will force the President’s hand and will include Huawei in the ban that threatened to shut down ZTE.

The U.S. has already convinced most of its allies to exclude Huawei from participating in providing equipment for the mobile 5G programs being introduced around the world. Australia, New Zealand, Japan, and England and France have already agreed and Poland and The Czech Republic seem to be on board for the ban as well. Germany was the lone significant hold out. But recent events concerning Huawei getting caught spying in Europe and being accused of stealing trade secrets in the U.S. seem to have turned the tide in Germany and Germany is now ready to join the ban on Huawei 5G. See Germany considers barring Huawei from 5G networks. I’ve been reading much of what the German press has to say about a German ban against Huawei and I predict it will happen, not because of US pressure, but because of the view there that Germany would be better protected by not having Huawei involved with its 5G network.

The potential impact of a US ban on the sale of telecom parts and components to Huawei and ZTE cannot be underestimated. Both these companies are entirely dependent on U.S. made components, primarily in the form of sophisticated microprocessors. This dependence goes far beyond the companies themselves. The Chinese high speed rail networks, air traffic control networks and telecommunication networks all rely on these U.S. made components. A ban on sales to Chinese companies would have a significant impact in China that goes far beyond the impact on the overseas business of Huawei and ZTE. This threat is far more significant than the current tariff dispute. It is also significant that the proposed bill is bipartisan.  These measures are not coming from the Trump administration and they are seeking to force the President to take measures far more severe than the President is currently seeking in the trade war tariff dispute.

What is really going on here? The various anti-PRC measures have focused on Huawei and ZTE as security threats. But the real issue runs much deeper. China is currently embarked on building a Digital Silk Road with the goal of creating an Internet/network/telecoms/GPS system entirely separate from the system currently built and operated by the U.S. and its allies. The Digital Silk Road is designed not to be interoperable with the U.S. led system. It is intended to be entirely walled off and separate.

Huawei and ZTE are the Chinese companies being called on to build the telecom equipment, cables and related infrastructure backbone for China’s Digital Silk Road. I see these recent actions as the U.S. acting to ensure that if the Digital Silk Road is built, it will be built without the assistance of the U.S. and its allies. This means the U.S. and its allies will not purchase Huawei products and technology and there will be no sales to Huawei of U.S. (later European and Japanese) semiconductors and other telecom related technical parts and components. If this plan succeeds, the Digital Silk Road will never be built. This critical issue is at the center of the trade war and it will not be addressed with tariffs. It will be addressed with the sort legislation and boycotts discussed above.

If you are planning to sell semiconductors and other high technology products to China, your plans are at great risk right now. Even if this bill is not signed into law, the direction of U.S. policy is clear.

Welcome to the new normal.