Are we witnessing the death throes of Huawei? A week ago, the Bureau of Industrial Security in the United States Department of Commerce issued a notification further restricting access by Huawei and its non-US affiliates on the Entity List to items produced domestically and abroad by using US technology and software. Another 38 Huawei affiliates were added to the Entity List which requires a licence for all items subject to the Export Administration Regulations (EAR). The aim of the new measures was to prevent Huawei from circumventing US export controls.
In May, the US had amended its own foreign direct product (FDP) rule to prevent Huawei accessing semiconductors that are produced with US software and technology anywhere. The amendment last week, refined the FDP rule further by making it applicable to transactions where US software or technology is the basis for a foreign-produced component or item that could be purchased by Huawei or its affiliates. In essence, the aim is to block Huawei from using third parties to access US technologies.
With the temporary general license for export also having expired last week, the tap to Huawei has now been turned off. Japan’s Nikkei cites lawyer Kavin Wolf to say that “every foreign-made semiconductor of any type anywhere in the world is now subject to US license requirements, if a Huawei company is in any way involved, directly or indirectly.”
In May 2019, the US had placed Huawei and many of its affiliates in its Entity List requiring US firms to get a license to export domestically-produced chips and software. In May 2020, the US expanded these rules to require chip-makers using US semiconductor equipment and technology to get its approval before producing chips designed by Huawei and HiSilicon.
US companies have almost 50 percent of the annual global market share in semiconductors. China’s share is just 5 percent. However, the US industry is symbiotically linked to the Asia-Pacific (China, Japan, Taiwan, South Korea) region in terms of design, production, testing and consumption. China uses 61 percent of the world’s chips in products for domestic consumption and exports, importing some $ 310 billion-worth of semiconductors in 2018. Sixty-six percent of Qualcomm revenue, amounting to $15 billion comes from China. In the first quarter of 2020, Apple revenues from China were $ 13.58 billion, which is some 15 percent of the company’s total revenues.
The US is also the leader in R&D, design and manufacturing process technology. Almost all the world’s key chip developers depend on US chip design and chipmaking tools made by Cadence Design Systems and Synopsus, Applied Materials, Lam Research and others to make semiconductors.
While there has been little political reaction to these moves in the US, industry bodies have been critical. According to the Semiconductor Industry Association (SIA) in the US, such broad restrictions “will bring significant disruption to the US semiconductor industry.” In other words, besides hitting at Huawei, the Trump administration moves would hit US majors. Expressing surprise at the move, they said that sales of non-sensitive, commercial products actually “drive semiconductor research and innovation here in the US.” The SIA represents some 95 percent of the US semiconductor industry.
The Trump administration officials meanwhile are continuing their campaign to push friends and allies to cut off links with Huawei, and they have been meeting more success in recent months, with the United Kingdom and Israel agreeing to the ban on Huawei. They maintain their stand is based on US national security and foreign policy interests.
The administration has been trotting out moral and legalistic reasons for blocking Huawei, whereas it would appear to be more of a need to ensure that China does not take the lead in a key technology area. From the realpolitik American point of view that makes sense, but it does not mean we should accept or work along its rationale. The problem is that the US is barring a technology which it does not itself possess, and is strong-arming others not to go for it, though 5G technology could provide a major boost to the global economy when it desperately needs one.
The charge on national security grounds is questionable. Till now the US has yet to provide any evidence to suggest that Huawei equipment is, or can be, misused. The company’s products have been used in more than 150 countries, and surely some evidence of its misuse should have surfaced by now. Indeed, the record shows it was Huawei itself which was penetrated by the US intelligence agency.
Perhaps the most intense forensic investigation of Huawei equipment has been going on in the UK for the past 10 years. The Huawei Cyber Security Evaluation Centre (HCSEC), funded by the company, was set up in 2014 to check its electronic boards and software. Since 2014, the work of the security-cleared British nationals there was monitored by the GCHQ, UK’s premier electronic intelligence agency, the Home Office and the Cabinet Office. These official entities were constituted into a Huawei Oversight Board. This was chaired by the head of the GCHQ’s National Cyber Security Centre (NCSC). Till now, they have not come up with any evidence that Huawei equipment will compromise their networks. The British decision to ban Huawei was taken on political grounds, following pressure by a wing of the ruling Conservative Party.
In 2012, a US House of Representatives Committee also investigated US national security issues in relation to Huawei and ZTE. They, too, did not come up with any specific evidence that these companies were involved in espionage. The bulk of the criticism in the reports related to the nature of the relationship between the companies and the Chinese State, which, as we know, is very different from those prevailing in the US. However, some professionals such as former Google head Eric Schmidt insist that Huawei “has engaged in some practices that are not acceptable in national security” without providing any specifics. Schmidt, who is currently chairman of the Pentagon’s Defence Innovation Board, has however said that instead of disengaging, the US should respond by outcompeting China and its technologies. In his view segregating platforms into Chinese and American systems could be positively dangerous.
There are many voices urging caution. Besides industry which is clearly going to be affected, there are people such as US Treasury Secretary Steve Mnuchin who have not been too happy over the administration’s reliance on sanctions as an instrument of foreign policy. His stand is based on a longer term view of US primacy. Experts such as James A Lewis of the CSIS say that the US needs a better targeted policy, one that can slow down the Chinese industry, but not harm American companies. The focus, he says, should be on semiconductor manufacturing equipment (SME), rather than the semiconductors themselves.
Another CSIS hand, Scott Kennedy is more pointed in his criticism, arguing that “this effort could seriously harm the United States’ economy and national security.” He cites studies by the Boston Consulting Group saying that a full decoupling would reduce the sector’s revenue by 37 percent and lower its global market share to 30 percent. In contrast, China’s market share could actually rise from three to 31 percent. Indeed, he argues that full decoupling could actually affect US national security negatively.
So, what does the future hold? As the US moves towards elections in November, we could see more moves against China. Soon it may become clearer that the US actions are not just about Huawei, but a wider multi-front conflict. The FDP is capable of wider application and we could see it being applied in other technology areas as well in the coming months. The Trump administration has been coming up with a number of counter-initiatives. In May 2019, it had gathered officials from more than 30 countries to discuss the national security and commercial considerations in evaluating 5G vendors. It came up with a set of Prague Proposals that cautioned countries not to use Chinese vendors, though China was not actually named in the conference draft.
US Secretary of State Mike Pompeo has also pursued a ‘Clean Network’ programme aimed at breaking the links with Chinese vendors allegedly to protect data of US citizens. As part of this, the US is targeting Chinese telecom companies, apps, cloud companies and undersea cables. However, the protections here are limited to US citizens. Third country professionals know, or should know, better than to accept any claims that the US is different from China when it comes to snooping on data.
The coronavirus pandemic has no doubt accelerated trends of restructuring some supply chains. Many countries ranging from the US to Japan and India have been embarrassed by their dependence on China for medical supplies and drugs during the pandemic. Whatever the fates will yield in November, it is clear that US-China relations are not going to go back to what they were before 2018.
The issue really is about strategy and tactics. Leave aside the crude manner in which the Trump administration is seeking to use the issue for its electoral purposes, there are two strands of argument we can detect. One is that decoupling is the best way in which the US can safeguard its national security. However, there are also those like Kennedy argue that “principled interdependence”, especially one worked with friends and allies, can provide better leverage to control, and even coerce the Chinese towards better behaviour. A China with its present capacities cutting loose from the global system could move in unpredictable, dangerous trajectories.
(This article first appeared in the ORF)Manoj Joshi is a Distinguished Fellow at the ORF. Views are personal.