Trump's Huawei ban escalates the US-China trade war into a tech Cold War

  • By giving Huawei Technologies the so-called death penalty, President Donald Trump’s administration has shown it does not trust the Chinese government to act in good faith.
  • Consider this a major impediment to any kind of trade deal.
  • The US is no longer just trying to block China’s companies from US markets – it’s trying to block them from markets all around the world.
  • In this environment, former Treasury Secretary Hank Paulson has said, “divorce is a real risk.”
  • Visit Business Insider’s homepage for more stories.

By giving Huawei Technologies the “death penalty,” the Trump administration has escalated tensions between the US and China to a level of hostility akin to a tech Cold War.

On Tuesday, the Trump administration put Huawei on the Commerce Department’s “Entity List.” It sounds benign, but the listing can make it nearly impossible for a company to do business with American firms.

This is a big problem for Huawei, considering the US is home to one in four of Huawei’s suppliers, including the chipmakers Qualcomm and Micron Technology. Analysts at the risk consultancy Eurasia Group pointed out that without US suppliers, Huawei would be unable to conduct even routine maintenance and hardware replacement.

The implications of the Huawei situation are much further reaching than President Donald Trump’s tariffs on Chinese goods. In moving to cut off Huawei’s supplies, the Trump administration is directly attacking a company tied to the Chinese government.

And there could be more to come. A bipartisan group of senators are working on legislation that would put a ban on selling technology to any Chinese company that violates US sanctions by doing businesses in countries like North Korea or Iran.

There’s also a bill sitting in the Senate Judiciary Committee called the China Technology Transfer Control Act. It would put all core technologies developed through China’s “Made in China 2025” technology push on the Commerce Department’s export-control list along with Huawei.

Made in China 2025 is meant to be the next phase in China’s plan to evolve its economy into a major player in the global tech market. The China Technology Transfer Control Act would put a wrench in those plans.

These are more than trade-war moves – they’re Cold War moves.

For those whose memory of Chinese history goes back only to its latest opening to the West, in the 1970s, this is probably a jolt. But the reality is that the US relationship with China is one of opening and closing – trust and hostility – going back to the 18th century.

And right now, it seems as if the pendulum has swung back toward hostility.

What is Huawei?

We know that Huawei makes phones and other telecommunications technology. We also know the Department of Justice charged Huawei with attempting to steal technology from a US company (a rather basic-looking T-Mobile robot named Tappy) and violating US sanctions to do business with Iran. We also know that we know next to nothing about who really controls the company aside from its founder, Ren Zhengfei.

After attending university, Ren joined the People’s Liberation Army and developed technology for it. He left the army in 1982 and founded Huawei in 1987. His daughter, who is under house arrest in Canada as part of the Justice Department’s case against the firm, is the CFO of the company.Ren owns 1.47% of Huawei, while the rest is owned by a trade union.

When questions about Huawei’s control started surfacing in Western media, the company invited reporters to look at a thick book held in a locked glass box at Huawei’s headquarters. That book, the company said, was the list of all the members of the trade union who own shares in Huawei. Those shares do not give them much power, though, and serve more as a profit-sharing agreement.

The economics professor Christopher Balding, formerly of Peking University, and the George Washington University Law School professor Donald Clarke wrote a paper examining the control of Huawei in April.

“Given the public nature of trade unions in China, if the ownership stake of the trade union committee is genuine, and if the trade union and its committee function as trade unions generally function in China, then Huawei may be deemed effectively state-owned,” they wrote.

This is why the world – particularly the US’s closest allies – is so circumspect about letting Huawei rule the future of telecommunications by building out 5G, or fifth-generation, wireless networks.

The former head of the UK intelligence agency, MI6, said allowing the company to build out the UK’s 5G networks would give the Chinese government a “potentially advantageous exploitative position” in the country. Australia has even barred Huawei from building its 5G infrastructure outright.

Huawei is trying hard to assuage fears that it might build backdoors in its technology for the Chinese Communist Party to access. It is no doubt using China’s vast network of lobbyists, friendly academics, and political allies to make that argument. And the company has gone so far as to promise to sign no-spy agreements with its customers, which itself is eyebrow-raising.

Tell me why did our love turn cold?

All of this is to say that the US does not trust Huawei. And since Huawei appears to have close ties to the Chinese government, it’s safe to say that Trump’s move against the company shows he doesn’t trust the Chinese government either.

This has scholars like Balding wondering whether a trade deal can even be made under these conditions.

“This lack of trust is more than just an existential or theoretical implication but directly impacts the ability to reach a deal,” he wrote as talks collapsed earlier this month.

“A major sticking point, from a variety of reports on multiple levels, appears to have been the issue of enforcement, verifiability, and or commitment,” he added, concluding: “In other words, the lack of trust proved quite consequential.”

To many in China, the US is being irrational. In January, the Hong Kong property tycoon Ronnie Chan, an American citizen who sits on the Council on Foreign Relations, told the South China Morning Post:

“People said China has been stealing technology. Well first of all, everybody steals technology. And number two, three years ago, I had a discussion with [former CIA director] general David Petraeus and [former US secretary of state] Condoleezza Rice on this subject of stealing technology from one another. Is that something that happened in the last one year? Did it get worse? It didn’t get worse, so what changed your mind?”

But China has changed. Under President Xi Jinping it has become more totalitarian and abusive of human rights. Critics point to the millions of Uighurs living under surveillance and going through reeducation in Xinjiang; they point to Xi’s never-ending anti-corruption drive that has helped to purge his enemies.

These changes and China’s global ambitions set the stage for a prolonged standoff between the US and China. John Garnaut, a former journalist and Australian government official who came to have rare access to the Chinese Communist Party’s ruling class, has argued that Xi is returning to the Chinese Communist Party’s Stalinist roots.

Here’s an excerpt from a speech Garnaut gave for the Asian Strategic and Economic Seminar Series called “Engineers of the Soul: Ideology in Xi Jinping’s China“:

“The challenge for us is that Xi’s project of total ideological control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money. It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces and generally keeps pace with and even anticipates China’s increasingly global interests.”

Cold future

What measures like giving Huawei the “death penalty” will do is sever the economic ties between the US and China. In the foreign-policy world this is known as “decoupling,” and in March, Chinese Premier Li Keqiang called such a notion “unrealistic.”

Others, like former Treasury Secretary Hank Paulson, have been less certain.

“At this point, after 40 years, when we have had one kind of relationship but now, quite clearly, face the daunting task of transitioning to a new one – anchored in a realistic and more sustainable – strategic framework – divorce is a real risk,” he said last year in an address at the Bloomberg New Economy Forum in Singapore.

That divorce could, according to Paulson, create an economic Iron Curtain dividing the world between the two largest economies.

Thanks to US-China trade tensions, this divorce is already happening in the world of supply chains, albeit with much confusion. Some US companies feel they must leave China but aren’t sure where to go or how they will be treated when they get there. It’s a mess – the kind of mess that is made when the world gets colder.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.