US Tightens Restrictions on Chinese Telecom Giants

FCC’s product ban further escalates a technological Cold War

Just a few years back, Chinese telecom giants Huawei and ZTE were ambitiously working to break into the US telecom market, with hopes of becoming major suppliers of smartphones and infrastructure equipment to the country’s biggest wireless carriers. They hired staff, opened new offices and, in the case of Huawei, began teaching the country how to pronounce its name. But a proclamation released last week by the US Federal Communications Commission (FCC) has practically killed the chances of either becoming a significant supplier in the US market.

Last Tuesday, the FCC took the major step of formally designating both Huawei and ZTE as threats to national security, and banning carriers from using their devices as part of any government-subsidized programmes. The FCC runs the Universal Service Fund, designed to connect underserved people and communities. The fund, which has an annual budget of more than $8 billion, subsidizes fixed-line and mobile services.

As part of this fund, the FCC’s Lifeline programme gives people on low incomes the ability to get at least a rudimentary mobile or fixed-line connection, offering a discount on the service of about $10 per month. The FCC’s new ruling specifies that equipment supplied within these programmes can’t be from either Huawei or ZTE.

In reality, the FCC’s announcement has limited direct impact on Huawei or ZTE. Huawei has practically no branded presence in the US and ZTE-made smartphones are only sold by several prepaid mobile service providers, although the company does offer original design manufacturer services, making several white-label devices for carriers. Significantly, the move will raise questions for other Chinese brands in the US.

Carriers will be wary of tarnishing their images. The US government is one of the largest enterprise customers in the world, so fixed-line and mobile service providers will have to weigh up the risks of ranging Chinese brands broadly, not just ZTE and Huawei.

Ever since the Trump administration took office in 2017, it has been applying pressure on Chinese companies owing to security concerns. This has been a process, with measures and countermeasures from both sides.

The latest move by the US authorities is just one among several made to weaken Chinese telecom giants. In 2018, the US government first aimed at ZTE when the Department of Commerce slapped the phone-maker with trade restrictions as it claimed ZTE had not sufficiently complied with a previous agreement. The situation was eventually resolved, but ZTE’s network equipment business in the US never recovered after that.

Further, in May 2019 Google stopped Huawei from using its suite of mobile services, after the Chinese company was placed on the US Entity List, which bars US companies from selling technology to certain companies without government approval.

In May 2020, the US government closed a loophole that enabled Huawei to buy semiconductors made with US technology outside the US. The new rule bans manufacturing using US software and equipment. This is the most significant move to date and essentially halts Huawei’s ability to purchase semiconductors for any of its product lines. Huawei’s primary manufacturing supplier TSMC has had little option but to fall in line with the restriction.

The Trump administration has also been trying to convince other countries to exclude Huawei from their 5G networks roll-out; Australia, Japan, New Zealand and Taiwan have effectively banned Huawei, and other countries are putting their use of Huawei technology under review.

The ruling on 30 June 2020 formalizes the unanimous FCC vote in November 2020 in which the regulator declared both Chinese companies as national security risks. Huawei, ZTE and others will be desperately pinning their hopes on the possibility that a new administration in 2021 could bring a shift in the FCC’s strategy. However, this is now a bipartisan issue that could have long-term implications for these two companies and others.

As China raises the stakes on the political stage in Hong Kong and India, this is fast becoming a technological Cold War of West versus East.