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Pentagon nixes proposal to toughen limits on U.S. sales to Huawei

Further limits, it argued, would hurt the ability of U.S. companies to spend more on research and development

Chinese telecom giant Huawei spends about $11 billion annually on U.S. parts, including computer chips. (Adrian Dennis/AFP/Getty Images)

Pentagon objections are stalling a Commerce Department bid to further limit Chinese telecom giant Huawei’s access to U.S. technology, according to people familiar with internal administration deliberations.

Officials in the office of Ellen Lord, the undersecretary of defense for acquisition and sustainment, this week vetoed a Commerce Department proposal that would have made it harder for U.S. companies’ overseas units to sell computer chips and other components to Huawei, said the people, who spoke on the condition of anonymity to discuss confidential matters.

The Pentagon feared additional limits would cost U.S. companies such as Qualcomm, Intel and Micron so much revenue that their research spending would suffer, causing them to fall behind their global rivals and imperiling the American military’s technological edge.

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The continuing debate over how and whether to tighten the crackdown on Huawei — expected to resume at the Cabinet level as soon as next week — illustrates the administration’s ongoing struggle with competing impulses toward China.

President Trump last week signed a trade deal with China, hailing it as a “really incredible breakthrough,” and frequently lauds Chinese President Xi Jinping as a personal friend. Two days earlier, Secretary of State Mike Pompeo had decried Xi’s authoritarianism and warned Silicon Valley against enabling China’s “truly Orwellian surveillance state.”

The Pentagon roadblock to tougher action drew sharp criticism from a trio of influential Republican senators on Friday. “Huawei is an arm of the Chinese Communist Party and should be treated as such,” wrote Sens. Ben Sasse (Neb.), Tom Cotton (Ark.) and Marco Rubio (Fla.). “It is difficult to imagine that, at the height of the Cold War, the Department of Defense would condone American companies contracting with KGB subsidiaries because Moscow offered a discount. We are concerned that the Defense Department is not appropriately weighing the risks.”

Long-standing worries about the potential for Chinese intelligence agencies to exploit Huawei gear used in American telecommunications networks came to a head last year.

The Commerce Department put Huawei on an export blacklist last May, severing its American supply lines. But the president granted the company, perhaps China’s most prominent global manufacturer, temporary waivers that allowed it to continue purchasing American components.

U.S. companies also shipped parts from their overseas affiliates to the embattled Chinese company, which is widely regarded as the global leader in next-generation 5G Internet technology.

The Commerce Department sought to close that loophole by tightening regulations on the overseas shipments. Currently, components may contain up to 25 percent American content that is governed by export controls. The department sought to lower that limit to 10 percent.

“The proposed changes would dramatically change the way that US export control rules have been applied to goods manufactured outside the US by non-US companies, would have an adverse impact on U.S. suppliers of parts and components to those non-US companies, and would not have a significant long-term impact on Huawei, since other companies would fill the gaps,” Douglas Jacobson, a Washington trade attorney, wrote via email.

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Huawei spends about $11 billion annually on U.S. parts, including computer chips, which are far superior to what Chinese fabrication facilities can produce. U.S. chip makers claim about half of the global market, a dominance that is sustained by heavy research spending.

Limiting U.S. companies’ ability to sell into the Chinese market “will erode the competitiveness of the U.S. semiconductor industry,” John Neuffer, president of the Semiconductor Industry Association, said last year.

The Pentagon objections scuppered the Commerce Department proposal, but they have not ended the debate. Commerce Secretary Wilbur Ross is determined to try again, according to several people following the discussions.

Cabinet-level debate over the next steps is expected soon, they added.

“We’ve got to make sure that policy changes like this are done in a way that cushions the impact on U.S. companies,” said David Hanke, a partner at Arent Fox and a former Senate Intelligence Committee aide. “We need to make sure there’s a level playing field for U.S. companies and not make policies that gave an upper hand to their competitors.”

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The debate is taking place in the aftermath of Trump’s Jan. 15 signing of a “phase one” trade deal with China, which requires Chinese purchases of an additional $200 billion worth of American goods and services over the next two years. Officials on both sides of the debate are trying to gauge the president’s willingness to toughen the punishment for a key Chinese company even as he seeks to cultivate warmer trading ties.

“We’re all expecting the White House to quash everything so long as the Chinese are buying,” said Derek Scissors, a resident scholar specializing in China at the American Enterprise Institute, who supports a tougher stance.

On Capitol Hill, a bipartisan group of lawmakers last week introduced legislation that would provide $1.25 billion to develop an alternative to Huawei’s 5G technology. Sens. Mark R. Warner (D-Va.), vice chairman of the Senate Intelligence Committee, and Rubio, a vocal critic of China, want the government to subsidize development of an open-architecture software application called O-RAN.

Administration officials for months have been trying to persuade U.S. allies to bar Huawei from their next-generation telecommunications networks. Those efforts would have a better chance of succeeding if the United States could offer an alternative, lawmakers said.