Trump Hits Huawei With Export Controls

Commerce Department adds Chinese telecom to designated entity list

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May 21, 2019

President Donald Trump indirectly targeted China's Huawei Technologies with a presidential order signed last week blocking telecommunications companies linked to foreign adversaries from selling equipment to U.S. firms.

However, a more significant new policy was imposed by the Commerce Department, which added Huawei to a list of foreign companies hit with tough export controls that prevent American technology companies from selling goods to Huawei, which has been identified by U.S. intelligence as linked to the Chinese military and intelligence services.

"While the presidential order is important to signaling allies how serious the threat is, the real punch is putting Huawei on the entities list," said retired Air Force Brig. Gen. Rob Spalding, a former Trump White House official involved in telecommunications policy.

The Commerce Department's Bureau of Industry and Security announced at the same time the new presidential order was made public that new export controls went into effect on May 16. The controls will be codified Tuesday, when the Federal Register lists Huawei and 68 affiliates in China and 25 other countries around the world as part of what it calls the entities list.

Designation on the list requires American companies to first obtain an export license from Commerce before selling most telecommunications goods to Huawei.

The export controls are regarded as a highly effective foreign policy tool, since failing to abide by the restrictions could result in U.S. sanctions, fines, or other criminal action.

Commerce Secretary Wilbur Ross said the enforcement action was not intended to be part of a negotiation with Huawei, and the company is not part of the ongoing trade talks between the United States and China.

"We think there is a significant danger to national security and to our foreign policy of the existing situation at Huawei," Ross said on Bloomberg Television.

The Bureau of Industry and Security justified the action in its announcement by noting the indictment of Huawei for illicit trade and financial dealings with Iran. The bureau said the affiliates were added because Huawei had used them to deceive investigators about financial dealings that are banned under U.S. sanctions laws.

The Commerce notice states that "there is reasonable cause to believe that Huawei Technologies Co., Ltd. has been involved in activities determined to be contrary to the national security or foreign policy interests of the United States."

Huawei calls itself a private company but has close ties to the Communist Party of China and has received funding and support from the Chinese government, including the People's Liberation Army and Ministry of State Security, China's intelligence service.

The restrictions are expected to severely impact Huawei's products, which in the past have been reliant on components like semiconductors supplied by Qualcomm and Intel.

The company also could be slowed in its announced effort known as Made in China 2025, which includes a bid to corner the global market on the emerging high-speed 5G telecommunications technology.

In compliance with the new controls, Google announced last week it will restrict Huawei from accessing the Android operating system and apps in a huge blow to Huawei's smartphones. Huawei is a leading manufacturer of smartphones. "We are complying with the order and reviewing the implications," a Google spokesperson said Monday.

Additionally, U.S. computer chip manufacturers Intel, Qualcomm, Broadcom, and Xilinx have halted all exports of chips to Huawei in response to the Commerce action. Germany's Infineon also has cut off some shipments to Huawei, Bloomberg and Japan's Nikkei reported.

The ban is expected to have a devastating impact on Huawei, which will be severely restricted in its ability to obtain vital components.

Ross said the presidential order is designed to protect the U.S. telecommunications supply chain for American companies by restricting imports of Huawei equipment. Placing Huawei on the entities list seeks to address concerns about exports of American gear and software to Huawei, he said.

Ross acknowledged that Huawei could seek to find other suppliers but that doing so would not be a seamless shift from American products. Also, the company may not be able to find products with the same quality as U.S.-made components.

Spalding said similar U.S. action against another Chinese telecommunications company, ZTE, nearly bankrupted that company before the ZTE restrictions were lifted after an agreement by the company to pay a fine and to accommodate U.S. concerns about its ties to the Chinese government.

The Huawei ban is similar to the use of international export controls during the Cold War designed to limit the Soviet Union's acquisition of western technology.

A U.S. and allied group called the Coordinating Committee for Multilateral Export Controls, known as Cocom, effectively squeezed Moscow and its satellites from gaining valuable technology.

Cocom disbanded in 1994 after the collapse of the Soviet Union.

The successor organization is another informal international group known as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.

A total of 42 countries are part of the Wassenaar, Netherlands, arrangement and meet every six months to exchange information on transfers of goods and technology to countries of concern. One of the nine categories of restrictions monitored by the group is telecommunications.

Spalding said that Wassenaar activities are conducted in secret, but that it is likely the United States will push the group to impose restrictions among the member states against providing telecommunications goods to Huawei now that the company has been placed on the Commerce entities list.

Banning of Huawei products in the United States will have little impact, Spalding said, because most of the major telecommunications firms already have banned Huawei. The import ban could impact smaller regional telecommunications companies that invested in Huawei gear.

The White House order is "more of a signal to allies and partners that we're serious," Spalding said.

Ross said Huawei differs from ZTE in that Huawei has been indicted for illegal trade and financial activities with Iran, and its chief financial officer, Meng Wanzhou, is under house arrest in Canada awaiting extradition to the United States in the Iran case. Huawei also was indicted for stealing U.S. telecommunications technology.

The FBI stated in a security briefing for corporate security officials that Huawei is part of a large-scale effort by the Chinese government to obtain technology through economic espionage.

Huawei was designated a "national champion" by the Chinese government. The designation is used for state-owned entities. Huawei produces routers, cell phones, and other equipment, and a key part of Beijing's state-directed program of acquiring foreign technology. The company is currently focusing on developing high-performance computers and cloud computing.

Huawei founder and CEO Ren Zhengfei is a former PLA electronic warfare specialist. Ren's daughter is Meng, the chief financial officer facing extradition from Canada.

FBI officials have said Chinese laws require all Chinese companies to cooperate with intelligence and security agencies in providing information to the government.

A senior administration official who briefed reporters on the presidential order said the order does not name Huawei. The order seeks to halt the unrestricted acquisition or use of foreign telecommunications technology related to U.S. adversaries.

The official said foreign adversary technology "augments the ability of those foreign adversaries to create and exploit vulnerabilities in information and communications technology or services, and that that can have potentially catastrophic effects and thereby constitutes an unusual and extraordinary risk to our national security, foreign policy, and economy."

Chinese Foreign Ministry spokesman Lu Kang said the Commerce action was politically motivated.

"The U.S. abuses export control measures and takes discriminatory measures on certain companies while making 'national security' a catch-all phrase," Kang said. "This is entirely against market rules and the principle of fairness, which does not serve the interests of the U.S. either. It is only natural for China to take all necessary measures to safeguard the legitimate rights and interests of Chinese companies."

Huawei had no comment on the presidential order but denounced the Commerce action.

"This decision is in no one's interest," the company said. "It will do significant economic harm to the American companies with which Huawei does business, affect tens of thousands of American jobs, and disrupt the current collaboration and mutual trust that exist on the global supply chain."

Huawei said it will seek unspecified remedies and work to mitigate the impact.