SNAPSHOT: US declares national emergency over foreign IT threats, heightening business and compliance risks for corporates
- On 15 May, US President Donald Trump signed an executive order declaring a national emergency over foreign threats to US information and communications technology and services.
- Shortly after the order was issued, the US Department of Commerce (DOC) added Chinese telecommunications giant Huawei Technologies Co Ltd(Huawei) and 70 affiliates to its so-called Entity List, effectively banning them from buying parts and components from US firms without US government consent.
- The decision reflects long-held US concerns over Chinese technology firms alleged ties to China's government and associated espionage risks. More immediately, it represents an escalation of the ongoing trade war between the two countries, and is likely to prompt similar counter-measures against US technology firms operations in China in the two-week outlook.
- More broadly, the measures form part of a growing technology divide between countries closely aligned with the Western powers who have taken action amid concern over adversaries cyber capabilities, and those who embrace the technologies despite the purported security risks.
US President Donald Trump
- In practice, the DOC's action is likely to prevent Huawei and its affiliates from manufacturing and selling some products, given their dependence on US suppliers, which under the new measures cannot supply Huawei unless they are granted US government approval.
- While the executive order does not explicitly target China or its firms, it represents the US's most significant punitive action yet against Chinese technology firms. The US government and intelligence community has long viewed Chinese telecommunications providers and their equipment as posing an espionage risk to the US, its citizens and companies. As recently as 9 May, for example, the US Federal Communications Commission blocked China Mobile USA's bid to provide international calls in the US, citing national security concerns.
- The US is particularly concerned about Huawei's participation in the construction of 5G networks in allied countries, including fellow members of the Five Eyes intelligence grouping the UK, Australia, Canada, and New Zealand and member states of the European Union.
- The measures follow similar US restrictions on Huawei over the past five years. In 2014, Huawei was banned from bidding for US government contracts, while last year, the US Department of Defense prohibited the sale of Huawei and fellow Chinese telecommunications giant ZTE's phones on US military bases worldwide.
- The restrictions also signal a deepening of the ongoing Sino-US trade war, which began in earnest in July 2018 with the imposition of US tariffs on USD34 billion of Chinese imports, and has since escalated into the imposition of reciprocal duties.
- Recent high-level negotiations to de-escalate the trade war have yet to see a significant breakthrough, and on 10 May the US imposed 25 per cent duties on USD200 billion worth of Chinese goods. The imposition of higher tariffs and new restrictive measures indicates that a trade pact is unlikely to be agreed in the two-month outlook.
- The measures also signal a growing divergence between countries openness towards Chinese technology across the world. An increasing number of Western countries have imposed restrictive measures on Huawei in the past two years, including Australia, Czech Republic, and Japan. Other countries, most notably in Sub-Saharan Africa, have embraced Huawei and ZTE's investments in telecommunications infrastructure, to some extent because of their comparatively low costs.
- This divergence is likely to increase as the geostrategic rivalry between the US and China develops in the coming years, particularly in the economic, technological, and military domains.
New tariffs have reduced Sino-US trade flows
- Immediately, US corporates supplying Huawei and its affiliates should alter operations and business planning to ensure compliance with the new measures, which come into effect on 17 May.
- US and other Western information technology firms operating in China should monitor announcements from the Chinese government regarding possible retaliatory measures in the two-week outlook. These are likely to include measures restricting companies access to the Chinese market, particularly for sales within China.
- In the longer term, US corporates should adjust strategic planning to reflect the heightening of US-China tensions over technology. Firms should conduct a thorough review of business, political, and security risks before sourcing technology from countries the US considers adversaries. US technology firms should also monitor legislative and regulatory developments which impact Sino-US trade.