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US-China: G-20, Huawei And India

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By Manoj Joshi

The most noted outcome of the G-20 held in Osaka is the US-China ceasefire on trade. But a somewhat less expected outcome was the easing of the American ban on the Chinese telecom major, Huawei.

Both decisions emerged from the long awaited meeting between Presidents Trump and Xi Jinping. After the breakdown in the Sino-US negotiations over trade in early May, the US had stepped up pressure on China by increasing tariffs on $ 200 billion goods from 10 to 25 percent on May 10. Beijing retaliated by hiking tariffs on $ 60 billion worth of US products. At this point, the US used the “nuclear option” by hitting Huawei with a crippling ban.

Now, under the terms of the agreement reached in Osaka, the US will not put additional tariffs on another $ 300 billion worth of goods and will remove some restrictions on Huawei’s ability to buy equipment and software from the US. For its part, China will resume purchase of American farm products, something close to the heart of the President.

And, of course, the two sides will resume their dialogue towards a possible future settlement. “We’re going to work with China — to see if we can make a deal,” Trump said, even while noting that the Damocles sword will hover over Huawei right till the end of the negotiations. The US is aware that targeting China’s most successful company is the best leverage they have to obtain compliance from Beijing.

But Trump’s remarks also seem to indicate that Huawei is not the thin edge of the wedge in a larger technology battle between the two countries, but merely a lever, a major one at that, being used by the US to force China to come to terms on the issue of trade. In his remarks he said he had taken the step to ease the ban “at the request of our High Tech companies.”

On 15th May Trump cited national security concerns to sign  an executive order that would prevent American companies from using Huawei equipment in their networks hereafter. Subsequently, Huawei was placed on a US Department of Commerce Entities List requiring all dealings with the company to be based on a valid license. These decisions would have led  US companies to halt all sales to Huawei by 15th August.

The impact on the company was immediate, vendors like Soft-Bank announced they would build Japan’s 5G system excluding Huawei, and the company’s smart phone business was immediately affected when restrictions were placed on its access to the Android operating system. The company’s founder was expecting losing $ 30 billion a year in lost revenues in the coming period.

But ripples of the impact was wider in view of its $70 billion global procurement budget.  US firms alone had taken $11 billion in orders from the company in 2018. These included giants like Intel and Qualcomm, but also smaller companies like Qorvo who make radio-frequency filters for Huawei. UK based chip design company ARM suspended its dealings with Huawei, as did Dutch chipmaker NXP Semiconductors and other companies in Taiwan, Japan and South Korea also felt the impact.

In a report on May 20, the Washington-based Information Technology and Innovation Foundation said that restrictive export controls would result in the US losing anywhere between $14.1 to $ 56.3 billion in export sales over the next five years, with missed export opportunities threatening 18,000 to 74,000 jobs. It may be recalled that in November 2018, the Bureau of Industry and Security of the US Department of Commerce had begun the process of identifying emerging technologies that were essential for US national security.

Trump tweeted on Saturday that the decision would not “impact our National Security” and that relations between the two countries were “back on track.” The decision to ease off on Huawei has been welcomed by US business groups like the Semiconductor Industry Association, but panned by hardliners like Sen Marco Rubio who called it a “catastrophic mistake.” The President said that the US would hold meetings on ways to deal with Huawei and added that his waiver was “about equipment where there’s not a great national emergency problem with it.” On Sunday, Larry Kudlow, director of the US National Economic Council and economic advisor to the White House said that Huawei was not being remove from the Commerce Department blacklist, all that would happen is that the department would give more licenses to sell products to Huawei, as long as the sales did not affect national security.

The Trump Administration’s calibrated handling of Huawei was evident from the outset when shortly after blacklisting it in May, the US Commerce Department issued a “90 day temporary general license” to Huawei to continue to use US technology that it already had a license for. As of now, the truce between China and the US remains fragile and temporary. In that sense, the shadow of a larger trade war between the two economic giants continues to hang over the world economy. The last truce lasted from the Xi-Trump meeting at the sidelines of the G-20 in Buenos Aires on December 1 till early May, a period of six months. It’s not clear whether the current ceasefire will last longer or yield a settlement. Despite the truce, the increased tariffs have remained in place, even if there have been concessions for Huawei, or increased purchases of agricultural products by China.

The increased tariffs have already led to a shifting of supply chains away from China. Many countries, including India, hope to benefit from the process, but at present, the winner appears to be Vietnam. But China is not necessarily perturbed by the shifting of supply chains, some of which was expected as wage rates in China have increased. Given its dominance in certain areas like electronics, it would be difficult to find replacements for the skilled labor and intricate supply chains that China possesses.

An example of this is apparent from Apple’s decision this month, to shift its final assembly of the Mac-Pro to China. This was the only major product that the company had been assembling in the US. Its products like the iPhone are designed and engineered in the US, but its components are sourced from several other countries as well and final assembly is abroad, often in China which has factories that have the scale and manpower required. In the case of the Mac-Pro, the company had hoped to do the assembly in Texas, but the plant failed to meet its requirements.

What all this does tell us is a lot about the power of the modern American presidency, even assuming that the bewildering course we are witnessing could be part of a design to push China to meet US demands. US officials like Vice President Pence, Secretary of State Mike Pompeo and NSA John Bolton who had been relaying Washington’s hard line are  probably a bit  baffled at the President’s claim, expressed in an answer to a question on the Sino-US relationship in a press conference following his Saturday meeting with Xi. “I think we are going to be strategic partners,” Trump said, “I think we can help each other.” This is a far cry from the characterization of China by US hawks, and indeed, its official National Security Strategy which describes China as a “strategic competitor.” Just what this strategic partnership could involve would be interesting.

Equally interesting would be some understanding of what President Trump and Prime-Minister Modi discussed in relation of Indo-American cooperation on 5G. The official transcript of the Indian media briefing in Osaka said that the two discussed how India and the US could leverage “India’s capacity in technological development in start- up and design and Silicon Valley and its role in developing 5G technology for mutual benefit.”

5G probably came up on the Indo-US agenda in Osaka as a result of the Pompeo visit to New Delhi on the eve of the G-20. The US Secretary of State is likely to have pressed New Delhi to go along with the ban on the Chinese company which is active in India. But with the US President himself indicating that the ban may not be permanent and be part of a trade deal with China, India has to ask itself why it is even discussing the issue with the US at a summit level.



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Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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