Blacklisting Huawei takes the US-China trade war to a dangerous new level

Resolving the trade war between the United States and China just got harder. Much harder.

Negotiations between Washington and Beijing were already on rocky ground following new rounds of tit-for-tat tariffs. Then, on Wednesday, the United States dramatically escalated its fight against Huawei, the world’s largest telecoms equipment maker and one of China’s national champions.

That could scuttle an agreement entirely.

“It could potentially put the entire economic relationship up for grabs,” said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington.

An ‘openly hostile act’

The US government has long argued that Huawei equipmentposes a national security threat, and could be used by Beijing for spying. It’s lobbying allies toexclude Huawei from next-generation 5G wireless networks. And earlier this year, the Trump administration filed criminal charges against Huawei, claiming that the company stole trade secrets from T-Mobile (TMUS) and violated US sanctions on Iran.

The barrage reached a new level of intensityon Wednesday.

President Donald Trump signed an executive order barring US companies from using telecoms gear from sources the administration deems a national security threat. That action is seen as targeting China and Huawei,a leader in 5G technology and a global business with revenue of more than $100 billion.

Sign at entrance to office of Chinese networking equipment company Huawei in the Silicon Valley, Mountain View, California, May 3, 2019. (Photo by Smith Collection/Gado/Getty Images)

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The Trump administration also added Huawei to the so-called Entity List of companies it says undermine American interests.That means US companies may need a license to continue supplying Huawei with crucial components.

The details of the designation and exactly what it means for Huawei still need clarification. But the action serves as a threatening reminder: The United States could sever vital supply lines.

Doing so would kneecap the tech giant, which relies on US companies such as Qualcomm (QCOM), Micron (MICR) and Intel (INTC) for crucial parts. Without them, both the company and its network of customers in 170 countries would be at risk, according to analysts.

“China will view this as an openly hostile act and a major provocation,” Paul Triolo, head of the geotechnology practice at consultancy Eurasia Group, said in a note to clients.

Trade risk

Much hangs on how China responds.

Despite higher tariffs announced in the past week and fraying trust, trade negotiations between the world’s two largest economies haven’t been abandoned entirely. Trump could meet Chinese President Xi Jinping at a G20 summit next month.

A resolution would relieve pressure on the Chinese economy, which this week exhibited fresh signs of weakness, and companies on both sides. Walmart (WMT) just announced it’s hiking prices because of the tariffs.

But China can’t just ignore the sharp escalation in the offensive against Huawei.

“The Entities List action potentially challenges Huawei’s ability to produce equipment and service existing customers,” Kennedy said. “That’s an essential challenge to China’s most successful company.”

Nationalist sentiment in the country is already hardening, Triolo warned.

The detention of Huawei CFO Meng Wanzhou in Canada, where she faces possible extradition to the United States on charges related to the Iran sanctions case, has already whipped up significant anger.

Huawei Chief Financial Officer, Meng Wanzhou, leaves her residence to attend British Columbia Supreme Court, in Vancouver, on May 8, 2019. - Meng, whose Vancouver arrest on a US warrant triggered a diplomatic row between Ottawa and Beijing, was to appear in court to fight for her release. Canada's justice department said the court will set the next key dates in an extradition process -- including the start of the formal hearing for Meng , which could take months or even years. (Photo by Don MacKinnon / AFP) / The erroneous mention[s] appearing in the metadata of this photo by Don MacKinnon has been modified in AFP systems in the following manner: [May 8, 2019] instead of [March 8, 2019]. Please immediately remove the erroneous mention[s] from all your online services and delete it (them) from your servers. If you have been authorized by AFP to distribute it (them) to third parties, please ensure that the same actions are carried out by them. Failure to promptly comply with these instructions will entail liability on your part for any continued or post notification usage. Therefore we thank you very much for all your attention and prompt action. We are sorry for the inconvenience this notification may cause and remain at your disposal for any further information you may require. (Photo credit should read DON MACKINNON/AFP/Getty Images)

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“Beijing is unlikely to continue serious trade negotiations when it feels held hostage by the US,” Triolo said.

If negotiations do move forward, it’s unlikely that Beijing will make significant concessions to the United States, especially on the tech issues at the center of the dispute, he added.

The United States has demanded that China end the forced transfer of technology from American companies, and has pushed back on Beijing’s bid to dominate the technologies of the future.

The potential for China to retaliate against American companies operating in the country has also increased, according to experts.

China could make life harder for American firms with hurdles like customs delays and heightened scrutiny by regulators. Big brands like Boeing (BA), Nike (NKE), Tesla (TSLA), General Motors (GM) and many others are all hugely dependent on the Chinese market.

“The risks are monumental, for China and for the United States as well,” Kennedy said. “This isn’t an incremental action.”