Trump’s executive order may be aimed at Huawei, but its impact could be far wider

18-May-2019 Intellasia | VOX | 6:00 AM Print This Post

Chinese tech giant Huawei has become a high-value target in the US-China trade war. But who will be harmed the most?

President Donald Trump issued an executive order on Wednesday barring US companies from using information and communication technology made or controlled by firms that pose a national security risk, and declaring a national emergency on the matter.

While the order didn’t mention any countries or companies in particular, it’s clearly aimed at China. More specifically, many are arguing, it’s aimed at Huawei, the Chinese telecoms and smartphone manufacturing giant.

The US government, along with several other nations, has long suspected that Huawei is using its 5G broadband network to spy on behalf of the Chinese government. Last month, the Times of London reported that the CIA has evidence that Huawei “has received funding from branches of Beijing’s state security apparatus” and shared that information with the UK to pressure its ally not to adopt Huawei’s 5G network.

“The President has made it clear that this Administration will do what it takes to keep America safe and prosperous, and to protect America from foreign adversaries who are actively and increasingly creating and exploiting vulnerabilities in information and communications technology infrastructure and services,” the White House said in a statement.

Huawei has vehemently denied the spying accusations. Its CEO even recently stated that the firm was willing to sign “no-spy” agreements with foreign governments such as the UK to ease concerns and open up business.

But those promises weren’t enough to stop the Trump administration from taking major steps that will limit business with Huawei over security concerns.

Separately from the executive order, the US Commerce Department placed the company and 70 of its affiliates on a trade blacklist, requiring Huawei to seek prior approval from the US government before buying any American parts. That could effectively halt business for some of Huawei’s product lines that rely on American suppliers.

This isn’t the start of Huawei’s troubles with the US government. In January, US federal prosecutors charged the company and one of its top executives with 23 indictments for allegedly stealing US trade secrets and other crimes, and requested to extradite Huawei’s CFO, Meng Wanzhou, from Canada, where she is being held under charges of fraud.

While the US isn’t alone in its legitimate concerns about Huawei’s 5G technology, the executive order and national emergency isn’t all about security; it’s inextricably tied to this political moment and an intensifying trade war.

Trump’s trade war is ramping up

The executive order comes at a time when the tit-for-tat trade war between China and the US is rapidly escalating. Trump has lambasted Chinese trade policies from the get-go of his political career during the 2016 campaign, he accused China of “raping” the US economy, and vowed to put an end to it. Since 2018, the president has launched a series of higher and higher tariffs on Chinese imports into the US, and Beijing in return has done the same for US imports.

Last year, the US imposed tariffs of up to 25 percent on $250 billion in Chinese goods, from handbags to railway equipment, out of $539 billion in Chinese imports total. China followed suit, imposing tariffs on $110 billion worth of goods (out of $120 billion in US imports, total). Currently, the US is upping the ante to increase its tariffs up to 25 percent on virtually all Chinese imports hitting an additional $300 billion.

Hopes that the countries could reach an economic ceasefire were crushed last week when two days of intense trade negotiations fell apart in Washington. Shortly after the talks ended, Trump raised the rate on $200 billion worth of Chinese products, particularly auto parts, from 10 to 25 percent. China in turn announced it would significantly raise taxes on a large but undisclosed total amount of American goods, including natural gas from 10 to 25 percent.

It’s a vicious cycle that upsets global financial markets and politicians alike.

So why is Trump doing this? Part of the stated goal is to reduce the trade deficit between the US and China. Last year, the US spent far more importing goods ($539 billion) from China than it made exporting goods to China ($120.3 billion). If that ratio were better, some economists would argue that would help create more jobs in the US, especially in specific sectors like manufacturing. However other economists would argue trade deficits are a red herring, and that it’s actually a sign of a stronger economy that US consumers, with more money to spend, are spending more on imports.

That’s why some, such as Vox’s Matt Yglesias, argue that Trump may be effectively using tariffs to gain leverage (whether intentionally or not) in larger negotiations about safeguarding US technology from spying and cementing the preeminent position of US technology in the global marketplace.

In addition to reducing the trade deficit, the US has demanded that China end industrial espionage and “forced technology transfers” that require US companies entering the Chinese market to give up some of their proprietary technology, or intellectual property, to Chinese companies. (It’s worth noting that these arrangements are generally ones that companies are willing to make in exchange for access to cheap, skilled labour.) Regardless, in the aggregate, there’s a concern that this weakens the dominance of US technology if companies are giving up their intellectual property, and why trade protectionists want to stop it.

Who will be impacted other than Huawei?

Virtually every company that exports products from the US to China or vice versa from electronics manufacturers to beer and wine producers has something to lose in poor economic relations between China and the US. With this executive order specifically, however, US companies that rely on cheaper Chinese suppliers for parts could also be the most affected.

As Recode has previously reported, the tariff increases have already had an impact on the bottom line of major US tech companies like Apple, who depend on selling their products to a growing Chinese consumer market. Apple CEO Tim Cook has publicly blamed “rising trade tensions with the United States” for decreasing sales in China that have had a big hit on the company’s overall business.

Still, it’s only the beginning of trade war woes for companies like Apple. Last year’s tariffs didn’t apply to iPhones and most other consumer electronic goods that rely on Chinese-made parts. But the latest round of proposed tariffs will tax these parts forcing firms like Apple to decide whether to absorb that added cost or pass it onto consumers with higher price tags for their phones.

So far, most US consumers haven’t felt a huge impact of this trade war yet, but they have seen an increase in the prices of some goods. Goldman Sachs economists studying the impact of tariffs on consumers found that prices of the nine most-affected goods rose 3 percent since early 2018 while all other goods, excluding food and energy, fell by 2 percent. Despite Trump’s claims that the Chinese government pays the cost of all the tariffs, US consumers can end up paying too if businesses raise prices.

On the jobs side, most Americans’ careers don’t depend on international trade; they work in the locally focused service industry like retail or health care. But you may be out of luck if you’re, say, a leather handbag designer who imports and resells purses made in China facing an overnight double-digit increase in handbag tariffs.

There’s another party who stands to uniquely suffer as a specific consequence of this added strain in US-China relations: Americans who live in rural parts of the country.

That’s because while larger carriers like Verizon don’t use Huawei tech to power their broadband network, many smaller, rural carriers depend on the company to provide cheaper equipment than what Western manufacturers can offer.

As the Financial Times reported:

Huawei equipment is not used by any of the major US carriers but is employed by about a quarter of smaller rural network companies, according to the Rural Wireless Association. The group has not said how much it might cost to replace existing Huawei equipment, though Pine Belt, one of its members, says it could cost them up to $14m, while another, Sagebrush, says it could cost $57m.

This could curtail the already limited, and poorly measured level of broadband access for rural Americans, deepening the digital divide in the US. According to the Federal Communications Commission, in urban areas, 97 percent of Americans have access to high-speed fixed service, but in rural areas, that number falls to 65 percent. The Rural Wireless Association told the Wall Street Journal that it could cost $800 million to $1 billion to replace all low-cost Chinese gear in their wireless networks, if they were forced to do so by new government restrictions.

So, Huawei and the companies it does business with (notably rural US carriers) will be directly affected by the order. But who else? What about other tech companies based in countries that are considered enemies of the US?

As it stands now, that’s pretty unclear. There’s still a lot of questions about exactly how the executive order will be implemented. The executive order didn’t list criteria for what constitutes being considered a foreign adversary, and what firms would fall under that category. Specific guidelines and regulations are expected to be released over the next 150 days.


Category: China

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