(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)
Under the pretext of national security, the U.S. Commerce Department is reportedly close to publishing a rule to significantly limit U.S. firms’ ability to sell products to Chinese technology giant Huawei. But the truth is the ban will do virtually nothing to help U.S. national security. In fact, it will harm America by weakening the competitive position of U.S. technology firms as their foreign sales erode.
Under U.S. law, the Commerce Department can limit exports to a foreign company if it determines the company constitutes a national security risk. That’s what the Department’s Bureau of Industry Security did in May 2019 when it placed Huawei on a restricted trade blacklist. But it’s never been exactly clear what the Trump administration’s real motivation is for the ban. At the time, the Department cited the fact that Huawei was providing prohibited financial services to Iran. Others in the administration have pointed to concerns with the security of Huawei’s 5G networking equipment. Still other government officials want to cripple the company commercially to slow its rise in the global 5G space. But troublingly, the Department refuses to provide a clear rationale for its actions.
Under current rules, Commerce can require a license or block the sale of certain products shipped to Huawei if U.S.-made components controlled for national security constitute more than 25 percent of their value. Under the proposed new threshold, this would be lowered to 10 percent, or even lower, and remove the national security component so non-sensitive, commercial technologies would be in Commerce’s regulatory grip as well. If approved, there would be no ability for the public to comment until after the revisions became the law of the land.
What’s behind this tougher move? Some in the administration appear to believe that Huawei represents a threat—however undefined—and that the U.S. should seek to cripple, if not kill the company by any means necessary. But if the real concern is ensuring the security of U.S. telecom networks, then the president has effectively addressed the problem by imposing an import ban. U.S. telecom carriers are not allowed to buy Huawei equipment going forward, and there are even plans to require carriers (mostly smaller, rural ones) to rip out existing Huawei equipment and replace it with non-Chinese gear. (This equipment would still be foreign, as no U.S. company has made wireless equipment since the mid-2000s when the U.S. provider Lucent was sold to Alcatel, a French company.)
There is certainly a debate about whether Huawei equipment can be trusted, especially since Chinese policy mandates that companies can be compelled to turn over data at any time for any reason. But as long as there is a ban on Huawei imports, it doesn’t pose a direct security threat to U.S. telecommunications networks.
So, what does that leave as most plausible explanation for the administration’s actions? It is likely that they see the export ban as a way to sideline Huawei and force allies to buy 5G equipment from other non-U.S. companies like Ericsson and Nokia. But if that’s the case, then it is delusional thinking. Even with the partial ban that has been in place since May, Huawei sales were up 18 percent overall in 2019. Moreover, even without full access to U.S. technology, Huawei is able to buy non-U.S. inputs from firms in other nations and increasingly is able to produce its own inputs, including computer chips. As a strategic matter, the ban thus will be fruitless. And worse, it will cut off U.S. technology sales to Huawei—$11 billion last year—making U.S. technology firms that much weaker, with less revenue to invest in cutting-edge R&D.
This is why some in the Defense Department—historically the agency most in favor of strict controls—are said to oppose a tightened ban: They worry America’s own semiconductor supply chain could be hurt. Indeed, such an action appears to be contrary to Commerce Secretary Wilbur Ross’s own views, as when he said, “The future prosperity of the United States depends on our strategic advantage in advanced technologies. ECRA [Export Control Reform Act] also clearly states that the United States must remain globally competitive in science, technology, engineering and—specifically—‘manufacturing sectors.’ It directs agencies like BIS to continually evaluate the impact of export controls on U.S. scientific and industrial leadership in order to ‘avoid negatively affecting such leadership’.”
Clearly, if the administration goes forward with this ban, it will be “negatively affecting such leadership.” And let’s not forget the significant chilling effect the Huawei ban is having on other Chinese customers, who have been furiously seeking out other, more politically reliable—non-American—suppliers. Moreover, it will reduce the likelihood that China will increase its imports of U.S. manufactured goods by the $45 billion it committed to in the new “phase one” deal. It makes little sense for the administration to say the phase one deal is going to increase U.S. exports of high-tech goods while simultaneously erecting new barriers to those very same sales.
As president Trump stated, “We actually sell Huawei many of its parts… We have great companies that are the leaders of a lot of what Huawei does, and we sell them a lot.” That’s true—but not if the new Commerce rules go through.