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Trump's U - turn at the G20 summit

July 3, 2019 | Expert Insights

Background  

Huawei Technologies is a Chinese multinational networking, telecommunications, equipment and services company. It is the largest telecommunications equipment manufacturer in the world.

The United States encouraged its allies to block Huawei a few months ago, claiming that the Chinese government could use Huawei products for surveillance. The US Justice Department has indicted Huawei with 23 counts for the alleged theft of intellectual property, obstruction of justice and fraud related to its evasion of U.S. sanctions against Iran.  

In May 2019, the U.S. Commerce Department added the ‘Entity List’, a move designed to bar the Chinese company from buying American components and software. Google, along with 30 other American firms that were core suppliers to Huawei, was pressured to consider suspending business activity with the company to comply with Washington’s decision. 

Analysis 

President Trump announced that US companies would once again be allowed to trade with Huawei. Larry Kudlow, White House Economic Advisor, confirmed that Huawei remains on the U.S. Entity List, but said the Commerce Department intends to grant more licenses to U.S. companies to allow them to do business with Huawei.

President Trump said at the press conference during Osaka Summit “One of the things I will allow, however, is, a lot of people are surprised we send, and we sell to Huawei a tremendous amount of product that goes into the various things that they make. And I said that that’s okay, that we will keep selling that product. These are American companies… that make product, and that’s very complex, by the way, and highly scientific. And in some cases we’re the ones that do it, we’re the only ones that do it. What we’ve done in Silicon Valley is incredible, actually and nobody has been able to compete with it, and I’ve agreed, and pretty easily, I’ve agreed to allow them to continue to sell that product. So American companies will continue, and they were having a problem, the companies were not exactly happy that they couldn’t sell because they had nothing to do with whatever it was potentially happening with respect to Huawei, so I did do that.” 

Huawei promoted it as a victory, describing the announcement in a tweet as a "u-turn" by the US. This means hardware components from companies such as Intel and Micron can continue to be sold to Huawei. Google will continue to supply the Android Operating System to Huawei. Kudlow said 'this wasn’t a “general amnesty” and that trading with Huawei was only being permitted in areas where no security risk was present.'  Before the ban came into effect, Huawei reportedly stockpiled critical components that would allow it to continue to operate for up to three months. 

Counterpoint  

However, President Trump’s backtracking from the ban on US companies doing business with Huawei has triggered severe criticism from lawmakers. 

Florida Senator Marco Rubio on Twitter called the move a “catastrophic mistake” and promised a congressional action. Other Republicans, including Florida Senator Rick Scott and Tennessee Senator Marsha Blackburn joined in the criticism of Trump’s move. 

We feel that this reversal can mar the credibility of the Trump’s administration’s warning regarding the threat of ‘national security’ posed by the company. It can be observed that this was the same stance taken for another company, ZTE.

U.S. companies were finding legal ways to sidestep restrictions even before reversal was announced at the summit. The companies took advantage of certain exceptions to export restrictions known as the ‘de minimus’ rule to legally continue shipments. Given that President Trump backtracked on the full force of his Huawei ban, it is possible that he will change his mind again. 

Assessment  

  • American companies such as Google which have licensed the Android Operating System to Huawei and chipmakers like Qualcomm, Intel and Microm were under pressure because they were to likely lose a third of their revenue when they cut off Huawei as a customer.  
  • According to our observation, the decision to continue selling to Huawei followed an extensive lobbying campaign by the Semiconductor Industry Association (which represents 95% of the U.S. semiconductor industry including chip companies like Broadcom, Qualcomm and Intel) which argued that the ban could hurt America’s economic and national security. We feel that given the massive cost of research and development for chips, continuing to miss out on revenue could hurt competitiveness. 
  • As we have maintained, if the blacklist was not relaxed, it would have encouraged China to develop the required technology domestically, leading to a possible fragmentation of the Internet, i.e. two separate internets that would each operate in silos. Eventually, China and Russia would have likely weaned themselves off the US technology. We feel that the reversal follows Russia’s decision to develop 5G technology along with Huawei, which will make Moscow the first 5G city by 2020. 

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