China Says It Will Retaliate for Increased Huawei Restrictions as US Industry Assesses Impact

China said it will take countermeasures to respond to increased U.S. export restrictions against Huawei, calling the changes an “abuse of export controls” and a violation of international trade laws. The restrictions, which place a license requirement on shipments to Huawei for foreign-made chips containing U.S. content, are a “serious threat” to China’s chip industry and supply chains, China’s Commerce Ministry said May 17, according to an unofficial translation. The ministry did not specify what the countermeasures will entail, but state media said China is considering placing U.S. companies on its so-called unreliable entity list and stopping purchases of aircraft from Boeing (see 2005150058).

The U.S. restrictions, released May 15, sent the semiconductor industry scrambling to determine the impact of the change. The rule will “complicate” operations for communication equipment manufacturers and could lead to drops in revenue, and fewer research and development efforts, and also potentially weaken U.S. competitiveness, said Doug Barry, spokesperson for the U.S.-China Business Council. The rule could also quicken the pace of Chinese technology development and create uncertainty for U.S. exporters seeking semiconductor licenses. “More transactions will require export licenses, adding additional expense and delays with no guarantee that licenses will be granted,” Barry said.

Although Barry said the rule may “hasten the development of indigenous Chinese technologies that can substitute for and perhaps compete” with U.S. products, the State Department said the rule places “foundries all around the world on a level playing field.” Chinese companies “of course would very much like to ... indigenize all aspects of the supply chain,” said Keith Krach, the State Department’s undersecretary for economic growth, energy and the environment, speaking with reporters May 15. “But at least for the moment … U.S. companies still have a very significant comparative advantage when it comes to the largely software-facilitated design tools that are involved in producing the very best chips.”

Richard Sawaya, the vice president of the National Foreign Trade Council, said the rule falls short of the industry’s worst fears, adding that NFTC members involved in the technology space “realize that national security-related technology controls are warranted.” But he also said industry would have appreciated more transparency as the rules were being considered and a comment period before the rules took effect. “That’s really what industry is asking for,” Sawaya said. “Due process.”

Although some in the U.S. semiconductor industry are still assessing the impact, the rule had an immediate impact on others, such as the Taiwan Semiconductor Manufacturing Company, which agreed to build a chip factory in Arizona hours before the Huawei restrictions were announced (see 2005150033). TSMC halted all new orders from Huawei in response to the rule change, according to a May 18 report from Nikkei Asian Review. The State Department said the U.S. did not agree to grant a license exception to TSMC in exchange for the company building a U.S. factory. The TSMC did not comment.

In a May 18 statement, Huawei criticized the increased restrictions, saying they “ignore the concerns of many companies and industry associations.” Huawei also said the rule will “undermine” the global semiconductor industry. “The U.S. is leveraging its own technological strengths to crush companies outside its own borders,” the company said. “This will only serve to undermine the trust international companies place in U.S. technology and supply chains.”

Huawei’s rotating chairman, Gou Ping, said in a May 18 statement that he is “confident” the company will work around the restrictions. “Our experience over the past year has made us confident that we can find a solution, that our customers and suppliers can continue to stand with us and minimize the impact of this discriminatory rule,” he said. The rule is likely to lead to “interpretive questions” from industry and compliance challenges for exporters doing business with Huawei, Crowell & Moring said May 18.

Commerce’s rule came after lawmakers urged the Trump administration to increase restrictions on exports of emerging technology to China (see 2003300039), with one senator saying the U.S. has been too passive in allowing China to overtake global supply chains. Sen. Ben Sasse, R-Neb., applauded the rule, calling it “long overdue.” The U.S. “needs to strangle Huawei,” Sasse said in a May 15 statement. “Modern wars are fought with semiconductors, and we were letting Huawei use our American designs.” To further decouple U.S. and Chinese technology supply chains, administration officials and lawmakers are working on tax breaks, rules, subsidies and other incentives to convince U.S. companies to move operations and “key suppliers” away from China, according to a May 18 Reuters report.