Why President Trump's Move Against Huawei Is Such A Big Deal

something very timely with just the right guest. Obviously, the trade tensions with China continuing to ratchet up, and it's really becoming less and less I would say about the trade deficit and some of these classical topics that we think of in a trade war, and much more about this sort of brewing technology cold war as people are putting it, and the moves that the Trump administration has

taken against some of China's big tech companies. Today, I'm going to be speaking on the subject with a previous Odd Lots guest. Going to be talking with Dan Wong. He's a technology analyst at gav Quel dragon Omics. He's also a Bloomberg opinion columnist, which is very cool. You might recall we spoke to Dan a while ago about the China Initiative, the endeavor on the part of the Chinese government to really sort of build its own domestic

leadership and all these big tech areas. So Dan is really the perfect person to discuss these new developments with. Wanted to get him on, wanted to get his perspective on the latest development. So without further ado, I want to bring in Uh Dan Dan Wong, thank you very much for joining us. So obviously pretty uh, pretty interesting moves we've seen over the last few weeks, a very serious ratcheting up in the trade war talks as President Trump has moved to uh really uh put the pressure

on Huawei, major Chinese tech giant. What do you describe to us to start? What is Huahwei? What is their significant in the global or in the Chinese tech ecosystem? Where did they come from? How did they become so important? So I think Huawei is the most important technology company in China uh, and it has a few major business lines. I think the two most important ones are it's smartphone

business UH and then it's a network equipment business. So as a matter of comparison, Huawei sold about as many smartphones as Apple did last year, although much lower profits UM. But it is a major seller of smartphones around the world, not just in China but also in Southeast Asia and now increasingly UH in Europe. The other major business line it has is network infrastructure equipment. So all of these things that make mobile calling possible and for G or

LTE possible. This a lot of it, at least outside the US, is provided by Huawei, And as the world is getting ready to transition to the next generation, the fifth generation of mobile network technologies or five G, Huawei is a pretty major player in that ecosystem. How cutting edge are they? I mean, if you look at the company and I guess either on both lines, whether it's smartphones or networking equipment, are they sort of a best

of breed player on this stuff? I think the consensus is that Huawei is very competent on both the smartphone business and then also the network business. So on the smartphones, I think people in the US don't really get to see this, But a lot of the reason that Apple has been doing not so well in China is that basically Huawei and a few other players have made pretty good phones at quite a bit lower prices than Apple does.

In fact, Samsung has been almost completely squeezed out of the China market because Huawis phones are really good, and Huawei is giving a run for Samsung's money basically and many more kids in the world. But you know, plausibly, Huawei is a little bit behind, are quite a lot behind Apple on the smartphone business. On the network equipment business, I think it is arguably really eating everything I hear

is that basically the network equipment business. Uh. Not only is it selling as good or cutting edge equipment or even better equipment than its competitors, which are mostly Ericson and Nokia, it is also often significantly cheaper. Talk to us about the action that Trump took. Obviously, the companies that supplied technology to Huahwei, including many American companies, are now theoretically restricted from doing business with them. So how

existential is this to Huahwei's business? Uh, this move from the Trump administration, I think it is a pretty existential threat. Now, what the Trump administration did was about two weeks ago it added Huawei to this UH list called the Entity List. And what this is effectively as this export blacklist, which doesn't allow US companies to export any equipment basically any

components or any technologies over to Huawei. And I think this is a really big deal because Huawei depends very significantly on US technology to make a lot of its own systems function. So on the smartphone side, it needs a lot of different types of chips. On the network equipment side, it also needs a lot of chips, and then also some specialty laser products. Not only is the

US are the US chips companies prevented from selling to Huawei. Basically, the US is able to cut off Google's Android from supplying to Huawei as well. This is another big risk this to the company. This is able to Basically I think there's a good chance that Huawei's smartphone sales overseas outside China could very well collapse this year because it doesn't have access to Android. And uh, there's just a lot of components that Huawei needs that are almost exclusively

supplied by the US. There's a lot of these types of chips, you know, if you have if you lack even a single chip inside inn a system, the entire thing may not work. And so I think this is a pretty big deal. And not only is the US able to stop basically U S companies from supplying to Halweih, the US has a little bit of an extra territorial reach as well. So the U S Department of Commerce

defines has this di Minimus threshold standard. If it takes a look at any foreign product sold by let's say European or Japanese or Korean company, and if over the value was generated in the US, then the U S Department of Commerce asserts that to be a US product. And so in this way, basically it can deny non U S firms from selling to the Chinese UH controlled

entity in this case allway as well. And so from news reports we've seen that basically in fine On, a German semi conductor firm, arm a UK semi conductor firm, and then also Panasonic, a Japanese firm, all have announced that they are going to stop us supplying to Haalwei. And as soon as this happened, the founder came out saying that's basically this may not be too big of a deal. We have plenty of spare tires. I really

don't buy that argument. I think that it is very unlikely that while we can still survive basically being cut off from almost all of its forts suppliers. So I mean, that's exactly right. I mean there had been reports and I guess Huawei itself saying that it had a stockpile of chips. Maybe it anticipated a potential action like this, but ultimately, in your view, it just doesn't have many cards to play as long as this action by the

Trump administration remains in effect. That's right. It's really striking just hearing you describe the severity of this, and to think that a few months ago we were talking about China is going to increase its purchase of US soybeans and that was going to help get a deal you

can just send. This is a very serious escalation. I think it is a very serious escalation that basically the US has this ability to turn off one of China's most important companies period that this is a company that is really important domestically in China as one of the few firms that really do have does have an international presence selling smartphones all over the world outside of the US.

Then also selling network equipment all over the world, but again outside the US, just to illustrate a little bit of how important this company is. Basically, you know, if you ignore the smartphones and focus on the network equipment business, it's become an incredibly consolidated market. So always main competitors selling four gen now as soon to be five G equipment are ericson in Nokia. Basically a lot of the

US position has pretty much vanished. These firms that used to be major US of phone technology mobile telephony technology companies included names like Motorola, Lucent and in Canada based Nortel. Basically none of these are going independent concerns anymore, and a Huawei Arison and Nokia are really the big players left in the game. You know, if you go is an incredibly consolidated market, and if the US is able to knock out the biggest player in a consolidated market,

bring the number of players from three to two. Basically the prices may not rise by only a few percentage points. For service providers let's say like Deutsche Telecom or Vota Phone or British Telecom, prices can may well double because there's just so much less competition and there's just so much more collusion when you have the world being supplied

by this Nordic duopoly. And so, you know, I think this is the actions are of the US are having reverberations around the world on not just in the U S and China as well. Is there something about the telecom equipment industry that has naturally caused it to have so many major flame outs. I mean you I forgot you know all these names that you mentioned, like Motorola, Lucent, nor Tell, all those companies like just sort of I don't remember exactly. I think when a Motorola like selled

a Google or something like that. Uh yeah, all these companies sort of like evaporated as shelves of their former selves. Why has this business been so brutal and gotten to the point where there's just a few a few oleglopolistic players. Arguably, well, arguably, I think that is a lot of the story with the uh, you know, chech general technology sector and not so much talking about the Internet companies here, although I

know that's a big debate. Basically, if you look at something like chips, something really striking to me recently was that Apple had to settle very long running litigations with Qualcom firm. It's been embroiled with in litigation for a really long time, mostly because a firm like Intel couldn't step up and be a credible supplier on something called moting chips. And so just generally, I think the story in this hardware space and technology is consolidation everywhere and uh,

limited players in basically every segment of hardware technologies. Is it a situation where it's just really hard technologically to produce this at scale? And so even you know, you mentioned a giant like Intel. I think they're still the biggest semiconductor company in the world and they're unable to deliver these motive chips to Apple at scale. Is it just because it's hard stuff to get right and get

good and doing high quantity? My understanding is that this is not one of the most difficult technologies that the world can produce. UM. A lot of this is still fairly low margin, and that's uh one of the reasons why so many firms have accidented the market. So one of the things I mentioned it in the intro um.

But obviously last time you're on the podcast, we're talking about the China Initiative and its efforts to become a world leader at all these different areas like aerospace and semiconductor and medical equipment and robotics, transportation, things like that. The fact that the US can, in theory still unilaterally deliver a death penalty to a major Chinese player. It can't do anything, I would imagine except remind the Chinese leadership how important it is to build up their own

domestic tech sector. I think that's exactly right. And I think in an area like semiconductors is where the U S power is clearest, that basically a lot of the world has given up on semiconductors. A lot of the European firms that used to be big have gone away, the same ghost for Japan uh and China's trying to work really hard to enter this technology space, in part

because it is just so owned by the US. And I think that, um, you know, the Chinese response to a lot of these actions really has to be to try to double down on its efforts to develop all of these different technologies. Not only can it basically not count on US supply, a lot of foreign supply may not be able to flow to China because of this

the Minimus threshold. And you know, I think it is politically intolerable for the Chinese that the US has this at will ability to shut off a major technology company. This is not the first time over the last year that the US has done this. In fact, the US has done this three times over the last twelve months. In April last year, the U s A. This is z T, which is kind of like a small Quahwei with both smartphone presents and then also network equipment presence.

And also did this to a company called fusansin KLA, which is a memory chip maker in Southeast China. And now the US is doing this to Huawei, And so I think the Chinese leadership really feels that needs to do a lot more to promote its own capabilities and these trips. So is this always where it was inevitably headed?

Because when Donald Trump decided to really change the US trading polished your with China the start of administration, the critique was that, you know, his complaints about the trade deficit and how much we import from China were off the mark or maybe not clear economic thinking, but that there really was some merit to this idea that on areas like technology and intellectual privacy, China really did pose some sort of threat and it didn't play by the rules,

arguably according to some people we've spoken with, So these moves against the Chinese tech sector, is this sort of always what it was really about? I think that's a

really fair assessment. And basically, if you look at the report that launched this trade war UH and referring specifically to the US Trade Representatives Section three or one report, Basically it lists a lot of these technology issues of front and center and core, including basically the term that they use force technology transfer UH and it mentions made

in China. I believe over a hundred times in the section three of one report basically that the US feels challenged on a lot of these technology areas, that it alleges that China doesn't play fair trying to compete against the US and a lot of these areas, and so it really has to maintain its technological edge over the Chinese. Now as of right now when we're recording this UM, I guess people are still holding out some hope for a deal. If you talk to investors and traders, they're like, oh,

they'll come to something. There's an upcoming G twenty meeting and Trump and she shouldn't paying or might meet. Maybe they'll shake hands there and there will be a thought. Do you see any possibility of a thought on the tensions here still at this point or have we sort of hit a point of no return in which the book sides are really going to be dug in for a while, and the relationship between these two countries is sort of permanently and revocably changed. I think it is

a permanent change in many ways. Now, I think it is really difficult to predict whether there will be a deal. I think it is at least still plausible that you can read a lot of the actions in recent weeks, ever since the Trump tweets on the tariffs on the five to be basically this negotiating, you know, tactic to get the Chinese to concede on a little bit more basically at the end of the process um or you know, maybe it is the case that both sides are basically

walking away from a deal. And if you had to push me, I would say it's a little bit of the ladder. It is um you know, especially with this escalation on Huawei, I think it just makes it much more difficult for the On the one handed, you know, taking down one of their major companies, it's really a big deal, and Chinese diplomats are not willing to see one of its major companies fail. On the other hand, you know, it just makes it much more difficult to

come to a deal. But one core point that I want to make is that regardless of whether there will be a trade deal, I think a lot of these technology issues are permanently changed. Basically, by that, I mean that while the White House was prosecuting this trade war, Congress has handed a lot of tools so the rest of the bureaucracy to deal with the tech sector, not just in China but also in the US by passing various laws. Dan Agri go into that further, I hadn't

seen much or heard much about this. So what are the sort of uh, the specific laws that Congress has passed to what you're referring. So I think this is the shows that the US has a really wide toolbox to deal with the Chinese and then also to some extent, the American tech sector. One recent legislative change is the

Foreign Investment Risk Review Modernization Act or FIRMA. So this is a bill that Congress passed last year that significantly strengthens this fairly obscure government body called CIFIUS c f i U S, which is the Committee for Foreign Investment into the United States. Previously, SIFIAS was scrutinizing acquisitions of

US companies by foreigners for a national security review. And you know, if this uh interagency body, which is staffed mostly by Treasury but also has representatives from Department of Defense and Department of Commerce and a few other places, decides that a foreigner cannot own a US asset, then it has the ability to uh, you know, block that acquisition. And what firma the legislative act passed in August did was expand the SIFEST power to scrutinize beyond acquisitions to

into non controlling investments. So basically, a deal now that involves a foreigner that is offers a foreigner any information rights or decision making rights has the chance to be rejected. And this is applies mostly to technology companies, even unlisted ones. So I think the interesting news from last month was that siphias forced the divestment by a Chinese company of Grinder, which is, uh, you know, I'm not sure if everybody on Bloomberg knows this, but it is a gay dating app.

This was a gay dating app that had been acquired by a Chinese firm. The sifia's body has decided that this is a national security risk for the Chinese to own our gay dating apps and therefore must be divested. And that's because of the data and the information that could be gleaned from that app presumably, but Siphias is not very often open about publishing these opinions. But I

think that is the right idea. What are there Are there any other tools that the US has available to you mentioned Sifia's I've usually we talked about export controls in the beginning. Are there any other tools in the administration's toolbox at this point to further apply pressure on Chinese investors or Chinese tech or Chinese companies. Another tool tool in the toolbox is um criminal prosecutions from the Department of Justice, and there is a formal named initiative here.

Basically it is called the China Initiative. Right before Jeff Sessions, the previous Attorney General, departed from his post, he announced this China Initiative, which is this political instruction on the rest of the bureaucracy to scrutinized Chinese actions a lot more closely. It includes a lot of things, but mostly ideas like trade secret misappropriation. If a Chinese person or firm has done that, then the US ought to really

bring it to prosecution. One interesting thing to note about the China initiative is that it designates five U S attorneys as part of a working group to carry this out. One of the five US attorneys is the U S Attorney for the Eastern District of New York, who is the person who issued the arrest warrant for Moment Show, who is the CFO of Allway. This is a very novel sort of prosecution, basically nabbing the CFO of a company alleged you to have broken sanctions and then also

committed financial fraud while she wasn't transit in Canada. And so this is creating basically a political issue as well. But basically you can see how these types of fairly novel prosecutions are now permissible in this new political environment. After you know, something like the China Initiative has been announced, we just have a few minutes left, so let's talk

about what we should be watching for next. So from China's perspective, obviously the moves against Huawei will encourage them to, you know, double down on building their domestic tech sector. But you know that's an overnight thing that's gonna it's a long term project. You can't just snap your fingers and create domestic replacements for chip suppliers. So what else might we see from the Chinese in your view, to address the current tent and both in terms of their

own domestic needs and also from a retaliatory perspective. So we believe that the Chinese retaliatory toolboxes quite weak. Um, Basically, you know, there's some news now that they may impose rare earth bands. I think that is a temporary sort of thing that will cause some pain. Our view is that it will not harass the U S companies too much, mostly because the Chinese companies are not very entwined in the US, but US companies are very entwined in China.

So Apple employees something like, you know, a few hundred thousand young Chinese men uh making iPhones through Fox Con and basically the Chinese government would like to see these people continue to be employed. A similar story goes for major US firms like GM or even Starbucks and McDonald's. It keeps a lot of people employed. So the Chinese you know, harassment tool basically also hurts itself quite a lot. We really don't buy the idea that the Chinese will

sell US treasuries. That is not unnecessarily a very effective option. But basically what they can do is to permit the currency to depreciate, which is mostly a market driven process that you know, if the U S imposes greater tariffs than the currency should weaken, and the People's Bank of China is not going to get in the way, uh necessarily unless it is quite a steep fall from basically

allowing the currency to depreciate a little bit. Further, real quickly on the rare Earth's questions, So it's literally just as of this morning when we're recording it, and this is, by the way, recording it on the twenty nine. There's a lot of rare earth talk today because of something

that was published in Peopil's Daily. Why is that people hear that and I see rare earths and apparently they're not even that rare, but they know that they're important for all kinds of advanced technologies and that currently about eighty percent of them come from China. Why is that threat not really as big of a deal as maybe people might think it when they see the headlines. So as you point out where earths doesn't turn out to be all that rare, it seems like there are major

deposits also in Australia, Japan, California. It's just going to take a little bit of time for that to come online. And actually this is sort of a similar point with you know, the um with US export controls trying to mike export control rare earths. While in general as economists we believe that the supply curve slopes up, you know, at higher price points, there will be more supplied come

supply this sort of thing. If the Chinese significantly raised the price, while there will be more processing overseas to do something like this. And similarly, as the Americans raise the price of semi conductors in some cases to affinity by totally banning them, while the Chinese also have more incentive to try to figure out a lot of this stuff as well, It's just going to take a lot more time for the Chinese to figure out most aspects of semi conductors than for most of the rest of

the world to develop their reserves of rare earths. And then, so what would you be watching for next From the West perspective again, I would come to export controls. That export controls is really, I think the most important tool in the U S toolbox to her China. I think we've seen them being used to devastating effect with Chinese firms with the ones I mentioned were Zte, Fudanti in Qua and now with Huawei. And I want to preview a little bit that this is another legislative change that

the US has offered. Basically concurrently with passing the bill on SIPHIUS, the US also passed the Export Control Reform Act in August of last year, and among several things, the Export Control Reform Act requires the Department of Commerce to come up with several lists of technologies. One is in UH Emerging List of Technologies, and others a Foundational List of technologies. The Emerging List is something we have

a proposal of. It hasn't been finalized yet. The Foundational List hasn't been finalized yet, so we have a sense of what the Emerging List looks like. It is UH. It enumerates technologies like artificial intelligence, biotechnology, quantum computing. If you take a look at a lot of these items, smart dust is in their M sensing whatever that is, it's in there. And these look like big science projects

rather than major pillars of US exports. But I think they really are quite material, mostly because the US defines and export and extremely brought terms. It is not just the sale of a final good across borders. Any transfer of information to a foreign national is deemed and export. It is a deemed export. So Joe, let's say that you know, you and I are sitting in a cafe in Australia and I am a U S national and you are a French national, or Iranian national or Russian national, whatever.

And if I'm just talking to you, or if I'm sending you an email about a control technology, which right now is mostly things like munitions and weaponry, that is deemed an export subject to control by the Department of Commerce.

And if you think through the implications of that, plus the idea that the US might control UH as something as vague as artificial intelligence AI as a national security technology, then you know, consider that US firm in the US, like Microsoft, Amazon, Intel, Apple, Amazon, the employee substantial numbers

of foreign nationals working on these technologies. And I've spoken to people at these firms who say that, you know, they have to really think about if they had to sequester or even terminate portions of their staff, otherwise they would be in violation of USX port control laws, So I think that is possibly the next shoot to drop, just depending on how this regulatory process goes. This is one of the risks that I think people ought to

be watching out for. I think it's going to create basically a lot of havoc um if the rolemaking process posed as you know, the proposal, what it looks like so people talk, I mean, you think about this term. You hear a tech cold war, so to speak. But that's really what this sounds like when you think of this idea that you know, US tech multinationals might not even be able to allow collaboration between their US based

researchers and foreign nationals. You could really just sort of see how essentially disruptive to the way the world works that would be. I think it could be really disruptive that h Potentially the US might stop flows of knowledge between people, and I think the you know, I I am still not quite yet ready to call this a cold war. I think that is a fairly extreme scenario. And in any case, basically China is much more entwined with the US than the U S was with the

Soviet Union. So how this exactly shakes out, I don't even know. If the previous Cold War might be a useful president. But yes, I think you are getting into some interesting problems here. UH industry has pushed back a lot against this deemed exports idea. One of the industries has suggested that basically, you know, if you take this steamed exports very seriously, an admitter of a technology, if it had gone up a final list of control technologies

might be prevented from possessing it. And oh, you know, you get into these very odd situations where you know,

a lot of things can be shaken up. Well, Dan, on that note, I'm thinking we have to reschedule you again, maybe every six months or something like that, for the next several years, because it feels like what you're describing and as you say, it's not going away, and the uh the ramifications of these moves are bewildering and kind of almost extremely hard to comprehend how they will really

play out. But really appreciate your perspective. The perfect guest given the spade of news over the last few weeks. So thank you very much for coming on. Well, thank you. Well, here is where I would normally chat with Tracy and talk about what a great conversation that was and that one actually was really fantastic. But since she's not here, I'm just going to wrap it up and obviously, uh, this has been another episode of the Odd Lots podcast and I'm Joe Wi isn't though you can follow me

on Twitter at the Stalwart. Even though she wasn't here, you should still follow Tracy on Twitter at Tracy Alloway, definitely follow our guest on Twitter, Dan Wong at Dan w Wong, and be sure to follow our producer Laura Carlson. She's at Laura M. Carlson, as well as the Bloomberg head of podcast, Francesco Levie at Francesca Today. Thanks for listening