Huawei Ban: Politics and Economics Intertwined

By Arslan Shahzad

The US China rift is widening day after day. One of the largest tech companies in the world is getting blacklisted by the United States. On May 16th, Huawei was added to the US Commerce Department’s Entity List, which restricts it from doing business with any US company without explicit government approval. There is a small price to pay for maintaining phones that have already in the circuit, but essentially, it means a de facto ban on US companies selling to Huawei.

Google has already revoked the company’s Android license, switching it to open source software and Intel and Qualcomm are considering similar moves. It is part of a much bigger fight between the US and China, and it goes a lot deeper than what you’ve probably think.

Most of your cell-phone, your laptop, your air conditioner, your light bulbs, all of it was probably made in China. But to realize why all that is happening, you have to look at the bigger picture here.

If you wanted to put a date on the beginning of the modern electronics industry, 1980 would be a pretty good choice. It was the year of Apple’s Initial Public Offering, or IPO, the year that the personal computer evolved from a personal pastime commodity into a mass-market consumer product.

But, more importantly, it was the year China created the Shenzhen Special Economic Zone, where Chinese companies could trade in a free market backed up by the power of central planning  of the Chinese Communist Party, the CCP. If the government wanted experts’ services to be cheaper, it could effectively lower the exchange rate. If a housing colony was getting in the way of factory construction, they could just tear the houses down.

Over the next 40 years, the CCP built Shenzhen into the greatest manufacturing hub the world has ever seen, at the same time that the tech industry was coming to life. Those forty years gave us the personal computer, the smartphone, and the quad-copter drone, with each generation of tech relying a little bit more on the “Trans-Pacific trade”. It is not that we would not have smartphones without China’s technical workforce, but they might look completely different and cost a lot more.

Now, that system’s starting to break down, and it’s not just because of Huawei. We’re in the middle of a really ugly trade war. In May, Trump announced a plan to raise import taxes as high as 25% on laptops and smartphones from China. Each new tariff from the US is met with more tariffs from China, which then triggers more retaliation from the US.

So far, the most damaging move from China has been a new tax on soybean imports, which has left the prices plummeting and costs US farmers billions of dollars. We’re seeing executives arrested and jailed on both sides, risking an unprecedented collapse in trade.

At first, Huawei’s problems were more about security than economics. Given how much Chinese spying happens in the US, a lot of people in the intelligence community are nervous about a Chinese company operating American cell towers. But this latest move goes further, putting Huawei’s entire cell phone business in jeopardy. Even the CEO admits it’s really hard to build a phone without US microchips.

The big picture problem is that building US goods in China just doesn’t seem like that great of a deal anymore. In the ’80s and ’90s, leaders in both countries saw outsourcing as a win-win deal. American consumers got cheaper goods, and Chinese workers got lifted out of poverty by a huge influx of labor jobs. In the US, it was great for microchip designers and tech shareholders but bad for factory jobs, and it contributed a lot to the cratering of the middle class. On the Chinese side, those same factory jobs have made the country a lot richer.

China has undone a lot of the currency manipulation that made exports so cheap to begin with. As a result, manufacturers have started looking to India and Vietnam for cheap factory labor which made Chinese tech companies want to design phones instead of just assembling them.as a result, they are less reliant on the US market than ever.

So what does all that mean for Huawei? If the commerce order holds up and the US doesn’t grant any licenses, it means the company may have to make a phone without any US components. That means no Gorilla Glass and no Micron flash memory, among other parts. But all those parts have foreign competitors, even if they’re more expensive and not quite as good. Huawei doesn’t want to build a phone without US parts, but they possibly can if they have to.

You can’t say the same thing for US companies. If Apple had to build an iPhone without China, or even just stop selling iPhone in the Chinese market, it would be a disaster for the company. Moving factories takes years, and it would plunge the entire industry into chaos. There’s still time to avoid that, but there’s no sign of either side backing down. And if we keep going, the US may have a lot more to lose than China.

The writer is Masters in International Relations from National Defense University, Islamabad. Kindly like my Facebook page “The Basement Journal” and follow me on Twitter @Journalbasement for any queries or suggestions.