NRPLUS MEMBER ARTICLE T he diplomatic fallout from the coronavirus has led observers to predict a new cold war between the U.S. and China. President Trump has repeatedly blamed the Chinese Communist Party (CCP) for the pandemic, calling it the “China Virus.” Meanwhile, Chinese propaganda outfits have spread conspiracy theories on social media, charging the U.S. Army with bringing the virus to Wuhan. Yet the diplomatic tussling only began to yield tangible policy changes last week, when the U.S. Commerce Department ratcheted up measures against Chinese telecommunications giant Huawei.
A new Commerce Department rule announced on Friday bars Huawei from purchasing any computer chips made or designed with U.S. equipment. It follows last year’s placement of Huawei on the DOC’s Entity List, which prevented U.S. suppliers from selling their products to the company. After a 120-day grace period, foreign companies that use U.S. chip designs will be required to suspend sales to Huawei.
The new restrictions are the latest in a series of steps the federal government has taken against the company. In January of 2019, the U.S. Justice Department charged the company with stealing trade secrets and evading sanctions against Iran. Another round of indictments, which included a racketeering charge, was released in February of this year. Aside from criminal activity, U.S. policymakers have expressed concerns about Huawei’s transferring technology to the People’s Liberation Army. The CCP requires all Chinese firms to cooperate with the Chinese military as part of its policy of “civil-military fusion.” In order to combat that policy, last month the Commerce Department enacted export controls on technology that could have military applications. In a statement, Senator Ben Sasse said that “the United States needs to strangle Huawei. Modern wars are fought with semiconductors . . . companies that depend on American technology can’t jump into bed with the Chinese Communist Party.”
Yet as eager as the administration has been to appear tough on Huawei, action against the company has until now been limited. The Commerce Department has continually granted extensions to its “temporary general license” (TGL) since placing it on the Entity List last year, allowing the company to do business with U.S. firms despite the restrictions.
The response from Huawei and industry researchers to last week’s announcement indicates that this time may be different. Huawei’s deputy chairman characterized the new rules as an existential threat to the company, saying, “We will now work hard to figure out how to survive.” In a note to clients, a Credit Suisse semiconductor analyst predicted that chipmakers would “halt their production of Huawei chips unless a resolution, settlement or loophole is found after a 120-day grace period.”
But the American Enterprise Institute’s Derek Scissors argues that the new rules are unlikely to be implemented any time soon. Even after three rounds of indictments, “We’ve never restricted Huawei under the entity list. We’ve given them five temporary general license (TGL) extensions. It’s a farce,” Scissors says in an interview. He predicts that the Commerce Department will extend Huawei’s TGL when it expires in August. (On the same day as it announced the new rules, the DOC, which declined a request for comment, granted Huawei an additional license extension. It said in a press release that it expected no further extensions to be granted.)
Retired brigadier general Robert Spalding, now a senior fellow at the Hudson Institute, disagrees with Scissors’s assessment. “I think it will be enforced, definitely. Even if there’s a delay, the door is shutting for Huawei to U.S. technology,” Spalding says, adding that he believes the new rules will severely undermine Huawei’s ability to deploy 5G technology.
In addition to imposing export controls, the U.S. has pushed to keep allies from working with Huawei, with mixed results. In January, the U.K. announced that it would allow Huawei to build some of its 5G infrastructure. In the wake of the coronavirus pandemic, British officials have yet to reconsider that decision. The U.K. is the only country in the “Five Eyes” intelligence partnership that has allowed Huawei into its 5G network. Elsewhere, Bharti Artel, one of India’s largest telecoms, inked a 5G deal with Finnish company Nokia in April, defying expectations that it would partner with the Chinese firm instead. The new rules from Commerce could influence other companies in the same direction.
The White House and Congress are also exploring other tools to decouple the economy from China. Reuters has reported that lawmakers have suggested incentivizing companies to reshore manufacturing from China to the U.S. with tax breaks and direct subsidies. Meanwhile, amid the ratcheting up of tensions, the much-heralded U.S.–China “phase-one” trade deal appears to be unraveling. As part of the deal, Beijing to purchase $200 billion worth of U.S. goods. The Peterson Institute’s Chad Bowman estimates that China has as of now purchased less than half that amount, and the global slowdown in economic activity caused by the coronavirus is making it increasingly unlikely that it will make good on the rest.
For his part, President Trump has expressed a desire to take further action against China. “We could cut off the whole relationship,” he said in a recent Fox Business interview. But any further punitive measures would decrease U.S. exports to the country, undermining one of Trump’s central goals. The short-term economic and political pain from a decoupling may be too much for the president to stomach.