The inter-connected nature (and vulnerability) of the global trading system was dramatically demonstrated with the announcement on 15 May 2019 by the US Commerce Department that companies would need permission (in the form of a special licence) to do business with the Chinese firm Huawei, the world’s second largest smartphone maker and the largest manufacturer of telecoms equipment. The US announcement amounts to an export ban of American technology to Huawei.

The Commerce Department subsequently qualified its announcement by allowing firms to supply Huawei for another 3 months, but for existing products only. No new sales are permitted. And that is where the effect could be most severe; because of the impact on Huawei’s future revenue.[1]

The US ban soon started to bite. Google announced that it will stop supplying components of its Android mobile operating system to Huawei. Several American chipmakers have also ceased sales. Other non-American companies are equally important, such as chip makers elsewhere. An effective ban will require Washington to exert pressure on them too.

How long will this battle last? Huawei issued statements about stockpiling crucial components and working on plans to become less reliant on American technology. Others are more skeptical. Without Google’s co-operation, sales of Huawei smartphones in, for example, Europe – Huawei’s second-biggest market – are likely to suffer. The supply of software required for its telecom networks could also dry up. Huawei is developing replacements but that will take time.[2]

The US Administration has justified its decision by invoking a “risk to national security”. US officials have been warning for some time that Huawei’s products open the door for spying, an allegation denied by Huawei. In order to make the American ban an effective instrument, others must also be convinced not to deal with the Chinese firm.

Matters may be more complex. The US has long suspected that Huawei benefits in other ways from its close ties with the Chinese government. The low prices of its products are suspected to be a result of subsidies by the Chinese government; to undercut other 5G equipment manufacturers.[3] This may explain why President Trump has subsequently hinted that there may still be a solution, as part of a bigger deal on the US-China trade war. Earlier this month the US increased tariffs on $200bn worth of Chinese imports from 10% to 25% after the two sides failed to reach a deal in their trade in goods battle.

The Trump administration had earlier used the same approach against another Chinese smartphone manufacturer (ZTE Corp.), following a ban on the sale of various components for illegally shipping goods to Iran. He later revoked the order against a fine of $1.3 billion and lower tariffs by China on American agricultural products. Huawei plays in a bigger league. It is China’s biggest high-tech company and is seen as a national champion. It also holds many crucial patents on superfast 5G mobile networks and is the world’s largest manufacturer of telecoms equipment. The stakes are higher.

Even if the American ban is lifted in exchange for trade concessions, a return to business as usual seems unlikely. Trust in American technology firms has been eroded.

President Trump’s real strategy (to the extent that there is a final one) is not yet clear. What makes matters more ambiguous is that he seems to be in re-election mode already. The battle with Beijing comes as a useful electioneering plank. What better evidence of putting “America first” than scoring against China and Chinese firms?

This is a high-risk game and could backfire. China is in no mood to be bullied and warned that it may retaliate by banning the export of rare earths.[4] Rare earths are a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment. China accounted for 80% of the US imports of rare earth minerals between 2014 and 2017. They were excluded from recent tariff hikes by the US, along with some other critical Chinese minerals.[5]

The fact that there are no efforts yet to invoke the WTO system in efforts to resolve the latest round of US-China tensions, may is an indication of how far the behaviour of the big players has drifted towards a contest of power. No rules-based solution is being mentioned; President Trump is clearly no fan of the rules-based game. The multilateral trade system is already under severe strain. The latest developments will be more bad news in Geneva.

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[1] The Economist, 25 May 2019.

[2] Ibid.

[3] https://finance.yahoo.com/news/us-adds-huawei-entity-list-132701048.html

[4] https://www.dailymaverick.co.za/article/2019-05-29-china-ready-to-hit-back-at-u-s-with-rare-earths-ruling-party-newspaper/

[5] Ibid.