Exactly a year ago, President Trump signed an executive order which prevented the government from doing business with any telecom company that was considered a national security threat. The Commerce Department added Chinese tech giant Huawei to a list of prohibited companies. Today, Reuters reports that the Trump administration is tightening a loophole which allowed Huawei to continue sourcing custom chips for its products from companies that use U.S. technology to produce those chips.

Under the rule change, foreign companies that use U.S. chipmaking equipment will be required to obtain a U.S. license before supplying certain chips to Huawei, or an affiliate like HiSilicon. The rule targets chips designed or custom-made for Huawei…

Commerce Secretary Wilbur Ross told Fox Business “there has been a very highly technical loophole through which Huawei has been in able, in effect, to use U.S. technology with foreign fab producers.” Ross called the rule change a “highly tailored thing to try to correct that loophole.”

The new rule will be phased in so that any shipments already in production can still be delivered for the next 120 days. After that, Huawei will be cut off from those sources. The company did not immediately comment on the rule change, though it has previously warned the Chinese government would defend them if necessary:

Huawei, which has warned that the Chinese government would retaliate if the rule went into effect, did not immediately comment on Friday. U.S. stock market futures turned negative on the Reuters report.

“The Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board,” Huawei Chairman Eric Xu told reporters on March 31.

And that seems to be exactly what is happening. While Huawei is still silent, the editor of Chinese state media newspaper the Global Times tweeted that the government was prepared to respond by cracking down on U.S. companies:

The Global Times has now published a news piece spelling out the threat. The article attributes some of this information to an unnamed source close to the Chinese government. But apparently the plan is to add the companies to a list and from there begin an endless series of investigations:

China is ready to take a series of countermeasures against a US plan to block shipments of semiconductors to Chinese telecom firm Huawei, including putting US companies on an “unreliable entity list,” launching investigations and imposing restrictions on US companies such as Apple, and halting purchase of Boeing airplanes, a source close to the Chinese government told the Global Times…

“China will take forceful countermeasures to protect its own legitimate rights,” if the US moves forward with the plan to change its rules and bar essential suppliers of chips, including Taiwan-based TSMC, from selling chips to Huawei, the source told the Global Times in an exclusive interview…

“China will launch rounds of endless investigations on those firms, just like swords hanging over their head. It will dampen investors’ confidence and squeeze their income in the Chinese market,” said an insider, who preferred to remain anonymous.

China is also threatening to put in place new regulations designed to damage smaller firms:

Most US companies included in the list may be small-sized US firms that are highly dependent on Chinese companies, such as US trading agencies, Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing who is close to Chinese government, told the Global Times.

“They are vulnerable to restrictive measures. Once Chinese authorities impose sanctions on them, the cost is ill-afforded. Most small firms will be pushed to the brink of collapsing,” Gao said. He noted that such countermeasures could serve as a “first-level” warning to the US side.

So it appears the trade war with China is back on. Trump has already put the new 120 day limit in place. China is demanding he back down or else face a kind of all out regulatory attack on U.S. companies that rely on China. We’ll have to stay tuned to see who blinks.

Tags: China Huawei