Selling to Huawei
August 19, 2019
The announcement by Secretary of Commerce Wilbur Ross extending a license that allows Huawei to purchase from U.S. suppliers should not be that baffling nor does it reflect contradictions in U.S. policy. The items sold to Huawei do not pose a national security risk. In fact, banning these items would harm national security by unnecessarily damaging U.S. companies.Most of the items that can continue to be sold are "end items," final products like semiconductors. Huawei cannot make modern mobile phones without these chips. But refusing to sell them does not mean that Huawei would go out of business. It will develop alternate sources of supply, and in the interim, the Chinese government is not going to let its favorite national champion collapse because of U.S. pressure. China will pay what it takes to keep Huawei going. At the same time, Huawei will find less advanced replacement technologies that will let it keep selling, at least to the lower end of the market. If there is any harm, it is will fall on U.S. companies.
This kind of self-destructive tendency has been a hallmark of U.S. export policies, whose history is littered with examples where an overly risk-averse approach or overly broad restrictions damaged or even destroyed strategic U.S. industries. In the late 1980s, two Western companies sold advanced machine tools to the Soviet Union that made their submarines quieter and thus harder to detect. In response, the Reagan administration restricted machine tool exports. This had the effect of driving the machine tool industry from the United States. China now produces more advanced machine tools than the United States.
In the mid-1990s, the United States imposed restrictions on communications satellite exports to China and, by extension, to satellite makers in Europe who used U.S. components. Since satellites require delicate handling, this made it very difficult for China to illicitly open satellites to acquire technology as it was being prepared for launch, and in any case, each satellite was accompanied by numerous monitors from the U.S. Air Force. While the intended target was China, the broad restrictions put U.S. companies at a disadvantage and led competitors to advertise that they made satellites that did not require U.S. approval for sale. This cost the United States a dominant position in the market.
The effect of these actions and others (such as the restrictions on encryption exports) was to build foreign competitors and damage the U.S. technology base. If the United States were to ban exports of end items to Huawei, China would accelerate its already formidable effort to build its own semiconductors and operating systems, and U.S. companies would needlessly lose revenue that supports their own research. It is what the Chinese could call a "lose-lose" for the United States.
China is only a few years behind the United States in its ability to make memory chips, several years behind in making the chipsets used in mobile phones, and perhaps a decade away from being able to make the most advanced chips, but right now, they are dependent on U.S. sources of supply. China cannot learn how to make chips by buying them from U.S. companies. The Chinese have failed to reverse engineer U.S. chips. Semiconductor technology is just too complicated to learn by x-raying a chip or sawing it in half and looking at it under an electron microscope. (The Chinese have tried both.)
The long-term problem with Huawei is to persuade nations not to buy from it, both because of the very real national security risk and because of its predatory business practices. The United States distrusts Huawei for good reason, and many countries share this distrust but are tempted by the gigantic subsides Huawei can offer courtesy of the Chinese government. Overcoming this requires different polices beyond the blunt instrument of the entities list. The United States is not going to put Huawei out of business, and it is not in the national interest to do the most harm to U.S. companies while trying to put Huawei out of business.
While the United States leads in many technologies, for 5G, this leadership is contingent on keeping companies healthy. This means protecting their intellectual property, their treatment in other countries, and in not blocking their revenue streams when there is no real national security benefit. The administration may have other motives in keeping Huawei afloat, but the most compelling rationale is to avoid harming ourselves.
James Andrew Lewis is a senior vice president at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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