Why Limiting U.S. Tech Exports to Chinese Companies Like Huawei Is a Risky Strategy

May 23, 2019

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As ITIF has argued for more than a decade, there is no question China is the world’s leading practitioner of the dark arts of innovation mercantilism. As such, the United States, and the global trading community more broadly, is well within its rights to insist that China dramatically roll back these egregious and unfair practices, including intellectual property theft, forced technology transfer, and massive industrial subsidies.

Several years ago this was anything but the consensus position, but that has changed as China has continued to intensify its policies—most notably with its “Made in China, 2025” plan—and as President Trump has taken highly visible actions in response. Most people in the trade and economic policy community are now convinced that the United States needs to more forcefully push back against unrepentant Chinese innovation mercantilism.

So the key question is no longer if, but how. Should the United States go it alone, or should it enlist allies in a “coalition of the willing?” Should the United States act within the confines of the World Trade Organization, or should it take steps on its own, some of which could go beyond the bounds of WTO rules? Should it enlist tariffs, or use non-tariff means? And related to the most recent Trump administration actions, should it limit U.S. technology exports to constrain Chinese innovation?

While China is rapidly gaining on the United States in innovation, it lags in many areas, since Chinese technology companies are dependent on key U.S. inputs, such as semiconductors. The option of withholding access to these cutting-edge technologies now and in the future gives the United States leverage. President Trump first considered but ultimately decided against using this leverage to cut off U.S. exports to Chinese telecommunications equipment company ZTE, a move that the Chinese government believed at the time would have been a death sentence for the company.

Then, in October of 2018, Trump went through with using this weapon against Chinese semiconductor firm Fujian Jinhua—cutting it off from U.S. suppliers, including suppliers of semiconductor-making machines. This was justified on two grounds. First, the firm had stolen U.S. memory chip maker Micron’s technology. And, second, the firm was receiving massive subsidies from the Chinese government to build its production factory. It’s too early to discern the effect, but the U.S. move is likely to significantly set back the Chinese company’s efforts to make dynamic random access memory (DRAM) chips, a key type of semiconductor enabling the global digital economy.

Last week, the president announced a new action to restrict exports of U.S. technology inputs, this time those going to Huawei. On the same day he issued an executive order banning Huawei equipment from U.S. telecommunications networks on the grounds that the equipment is insecure and could allow the Chinese government to spy on U.S. communications, Trump subjected the company to strict export controls. Within days, a number of leading U.S. technology companies  said that they would comply with the ban. In this case, while the first step is justified if Huawei equipment is inherently insecure, the second step cannot be justified on security grounds. The import ban effectively addresses the security issue. Weakening Huawei by withholding exports will have no effect on that.

Therefore there are only two reasons for imposing an export ban on Huawei. The first is as a negotiating tactic. President Trump has shown he is willing to rachet up threats in negotiations in order to get the other side to an agreement. If that’s what the export ban is all about—either to get the Chinese government to agree to a deal acceptable to the United States, or to get Huawei to plead guilty to violating export controls to other nations so that allies also ban Huawei equipment—then it may be effective, because Huawei is significantly dependent on U.S. technology, including operating systems, chips, optoelectronic modules, and even the glass on its phones. Huawei is China’s leading national tech champion, so the Chinese government cannot afford to let it fail.

However, if this is part of a broader strategy to weaken Chinese technological innovation on the grounds that China has gained a significant share of its advantage through unfair means, it is likely to backfire. First, unless the sanctions lead to the bankruptcy and destruction of Huawei, they will accomplish little. Unless the sanctions kill the company, Huawei (and the Chinese government) will just double down on their long-held goal of developing the technologies they need to be completely independent from the United States. And in the short- and medium-term, non-U.S. firms and products will fill the vacuum.

In other words, limiting U.S. technology exports to Chinese companies is a risky strategy. Furthermore, limiting exports of U.S. technology reduces output and jobs in the United States, hurting U.S. competitiveness and speeding up China’s technology independence. Indeed, an ITIF analysis of potential limits on exports of emerging technologies shows that, depending on the stringency of the controls, U.S. firms could lose $14 to $56 billion in export sales over five years, threatening 18,000 to 74,000 jobs. And placing Huawei on the entity list will have significant ramifications for U.S. suppliers, which provide about one-seventh of Huawei components. Out of $70 billion Huawei spent buying components in 2018, some $11 billion went to U.S. firms including Qualcomm, Intel Corp, and Micron Technology Inc.

So, yes, we need to get extremely tough on Chinese innovation mercantilist practices, which hurt not just the American economy and American workers, but the entire global innovation economy. And Huawei, like all Chinese enterprises (or enterprises from any nation, for that matter), needs to abide by the rules China committed to upholding when it joined the WTO, including not stealing foreign intellectual property, as the U.S. government has alleged Huawei has done. To the extent Huawei has used unfair practices such as IP theft, the U.S. government is entirely justified in bringing a WTO case, or aggrieved parties are justified in suing Huawei in Chinese or other foreign courts. And if the administration insists that Chinese enterprises play by WTO rules but they don’t, then it is justified in responding accordingly. But that response must be measured and proportionate. If not adequately balanced, limiting U.S. technology exports to Chinese firms is just cutting off our nose to spit our face.

In this sense, one can only hope that the view of former Trump advisor Steve Bannon regarding Huawei is not the administration’s. Bannon was quoted as saying that cutting off exports to Huawei is “10 times more important than walking away from the trade deal. [Huawei] is a major national security threat, not just to the U.S. but to the rest of the world. We are going to shut it down.”

This view is profoundly misguided. As noted above, to the extent Huawei is a security threat import bans address that problem. In addition, while an export ban will likely inflict a serious blow on Huawei, it is not likely to “shut down” the company. And finally, rolling back the broad array of Chinese innovation mercantilist practices that negatively impact most if not all U.S. innovation industries is vastly more important than the individual challenge from Huawei. Sacrificing the agenda of getting China to roll back its innovation mercantilist practices in favor of targeting one Chinese firm would be a profound mistake, and highlights the central importance of ensuring that U.S. economic and trade policies toward China are strategic and focus on what is good for the American innovation economy.