Huawei’s leadership in 5G communications is seen by the US as a provocation. Trump has imposed a series of sanctions on Huawei, while some of U.S. traditional allies have only limited or even welcomed Huawei equipment. After the latest rounds of talks, when China and the United States reached a partial agreement to ease restrictions on Huawei, Trump and the Commerce Department said that American companies could continue to sell parts to Huawei, provided the technology supplied does not pose a national security threat.

Why is the US so wary of Huawei’s rise?

China’s rapid growth since its accession to the WTO and after the 2008 financial crisis has made western countries envious, especially the United States. Here are the main points causing Trump to launch sanctions against Huawei:

• Huawei has stormed the US leadership in 5G and even in the telecommunication industry
• The US wants to curb “Made in China 2025” Initiative
• The sanction on Huawei is a bargaining chip

The growth in the high-tech sector represented by Huawei and ZTE is a sign that America’s economic and technological supremacy has been shaken. According to IPlytics, a German patent database company, China had 34.02 per cent of the standards and necessary applications for 5G communications as of March 2018. Out of all the standards and applications. Huawei owns 15.05%, ZTE accounts for 11.7%, Qualcomm for only 8.19%. Interestingly, the 5G patents developed in the US are only 14% of the globally developed 5G technologies.

“Made in China 2025”: the tech plan that sparked international backlash

“Made in China 2025” is a strategic plan of the Chinese Premier Li Keqiang and his cabinet that was signed in May 2015. With it, China aims to move away from being the world’s “factory” (producing cheap, low-quality goods due to lower labour costs) and move to produce higher-value products and services. It is, in essence, a blueprint to upgrade the manufacturing capabilities of Chinese industries.

The goals of “Made in China 2025” include increasing the Chinese-domestic content of core materials to 40 % by 2020 and 70 % by 2025. The plan focuses on high-tech fields including the pharmaceutical industry, automotive industry, aerospace industry, semiconductors, IT and robotics etc, which are presently the purview of foreign companies.

Unfortunately for China, the administration of the US President Donald Trump has put the industries and products associated with this plan at the very heart of the trade dispute. Trump has taken immediate action trying to curb China’s development by imposing sanctions on ZTE, tariffs on Chinese goods and extraditing Meng Wanzhou, Huawei’s CFO.

China has responded by imposing tariffs on American goods. Trade talks were deadlocked, and tariffs became just a means to put each side in a better position in the negotiations.

Sanctions against companies like Huawei are also a way for the United States to pressure China to compromise with the “Made in China” strategic plan. These sanctions will force China to use more capital and administrative resources into boosting the technological upgrades of the plan. Ultimately, Trump’s demands will require China to slash state support for the high-tech industries and to stop forcing international companies to share core technologies with the Chinese enterprises (protecting IP). 

US sanction on Huawei and the global economy

The Trump administration’s imposition of restrictions on electronic components and software services for Huawei and related companies will set a precedent for arbitrary state sanctions against companies and force China to build or enhance its entire industrial chain from scratch. Globally, there will be a lot of waste and duplication of resources, weakening investment in basic research and technological innovation in cutting-edge semiconductor fields. The effects of the trade war are already being felt, with multinational companies relocating, threatening China’s current economy and its plans to upgrade its technology. 

According to the International Monetary Fund (IMF), the world economy is expected to grow 3.7 per cent in 2019, with further declines in the medium term. Trade measures between China and the United States will adversely affect economic activity in 2019 and beyond. 

The Organization for Economic Cooperation and Development (OECD) also released its global economic outlook report, predicting that the world as a whole will grow by 3.5% in real terms in 2019 and 2020, down from an estimated 3.7% in 2018. The escalation of trade uncertainty between China and the United States will further increase the risk of Global Recession, and the Trump administration’s sanctions on Huawei will further complicate the prospects for global economic recovery.

Political tensions and Chinese researchers

The potential damage to China’s industrial future is hard to quantify but important. If the US government sets more restrictions on Chinese students and researchers studying in US universities or blocks the interaction of scientists from the two countries the pace of knowledge acquisition in China may slow appreciably.

Of course, the US will suffer as well. Removing Huawei from the list of potential suppliers of 5G technology, an essential building block of the digital economy leaves the US exposed to a duopoly market.

Huawei and China’s rapid growth in technology and innovation are inevitable. The US and its allies must seek ways to strengthen their own power instead of simply clamping down on Huawei.

The world economy has reached a balance of strength but still full of risks and uncertainty. US and China should take the responsibility of sustaining world economic growth and seek further cooperation instead of opposing each other.