After months of deliberation, the Trump administration finally dealt a knockout punch to leading Chinese telecom equipment manufacturer Huawei, when the President signed a long-awaited executive order to declare national emergency. Although the order was company and country agnostic, it effectively barred U.S. firms from either buying or selling any telecom equipment to firms like Huawei that are deemed to pose national security risks, virtually crippling its operations.
The directive triggered a chain of events by first invoking the International Emergency Economic Powers Act, which bestowed the President with the authority to regulate commerce in view of the national emergency that threatened the country, followed by the enforcement action by the Commerce Department.
The Entity List
After the White House passed the order, the U.S. Commerce Department immediately added Huawei along with 70 of its affiliates to the Entity List – a list of entities that are ineligible to receive any item without the government approval. The addition to the dreaded list appears to be a fallout of a 13-point indictment against Huawei and its CFO Meng Wanzhou for allegedly deceiving international banks into clearing transactions (worth millions of dollars) with Iran despite U.S. economic sanctions.
Notably, Huawei was also charged by the U.S. Justice Department with a 10-count indictment, accusing it of stealing robotic technology from T-Mobile US, Inc. (TMUS - Free Report) to test smartphones’ durability. The indictment traces its roots to a civil suit filed by T-Mobile in Seattle District Court in 2014, in which it accused Huawei of stealing trade secrets at the behest of the R&D team based in China. Although the case was settled with a $4.8 million compensation to T-Mobile in 2017, it seems that the Trump administration will leave no stone unturned to ban Huawei from the country.
Is the Caution Necessary?
The United States has long suspected Huawei to be an extension of the Chinese government due to the close ties of its founder with the military. Moreover, the fact that Huawei products are remarkably cheap owing to the huge subsidies by the Chinese government to undercut other 5G equipment manufacturers, such as Nokia Corporation (NOK - Free Report) , Ericsson (ERIC - Free Report) and Samsung Electronics, further evokes a feeling of mistrust. Jim Lewis, a cybersecurity expert with the Center for Strategic and International Studies, observed, “… the Chinese government is not paying hundreds of millions of dollars to build another country’s telecom infrastructure because they admire its cuisine.” The implication of the vested interests surely warrants a caution among the U.S. policymakers.
Moreover, the superfast 5G networks will facilitate the transfer of a larger pool of data, making them more vulnerable and prone to cyber theft. 5G is also likely to result in $12.3 trillion of global economic output by 2035 (per data from research firm IHS Markit). Critics contend that countries could go to any extent to gain a greater pie in this trillion-dollar market in order to have a political, economic and technological advantage.
As Huawei enters the Entity List, U.S. suppliers like Qualcomm Incorporated (QCOM - Free Report) and Broadcom Inc. (AVGO - Free Report) will be mandated to apply for licenses to provide components to the Chinese firm. These licenses are likely to be subjected to strict U.S. export control regulations, and companies will need to justify that the transfer of such items will not jeopardize national security, making their obtainment extremely difficult.
This is likely to act as a death knell for Huawei as it largely depends on U.S. firms for raw material supplies. Moreover, it garners significant revenues from the American shores by selling its finished products in the vast rural markets due to its low price.
Trump had earlier used the same ploy against another Chinese smartphone manufacturer ZTE Corp., crippling its operations following a seven-year ban on sale of various components for illegally shipping goods to Iran. He later revoked the order against a fine of $1.3 billion and lower tariffs by China on U.S. agricultural and farm products.
Whether the strategic move is aimed at seeking similar favorable trade concessions from China or preventing any further retaliatory tariffs from the communist nation remains to be seen.
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