By David Shepardson and Karen Freifeld
WASHINGTON/NEW YORK (Reuters) - The Trump administration on Wednesday took aim at China’s Huawei Technologies Co Ltd, banning the firm from buying vital U.S. technology without special approval and effectively barring its equipment from U.S. telecom networks on national security grounds.
Taken together, the two moves threaten Huawei's ability to continue to sell many products because of its reliance on American suppliers, and represents a significant escalation in the U.S. government's worldwide campaign against the company.
The steps also come at a delicate time in relations between China and the United States as the world's two largest economies ratchet up tariffs in a battle over what U.S. officials call China's unfair trade practices.
Washington believes the handsets and network equipment for telecommunications companies made by Huawei could be used by the Chinese state to spy on Americans.
Huawei, which has repeatedly denied the allegations, said in a statement that "restricting Huawei from doing business in the U.S. will not make the U.S. more secure or stronger; instead, this will only serve to limit the U.S. to inferior yet more expensive alternatives, leaving the U.S. lagging behind in 5G deployment."
"In addition, unreasonable restrictions will infringe upon Huawei's rights and raise other serious legal issues."
The ban on U.S. suppliers, which appears similar to one on Huawei rival ZTE Corp (HK:0763). last year, could hit the shares of Huawei's biggest U.S. suppliers, including chipmakers Qualcomm (NASDAQ:QCOM) Inc and Broadcom (NASDAQ:AVGO) Inc.
In the first action taken on Wednesday, President Donald Trump signed a long-awaited executive order declaring a national emergency and barring U.S. companies from using telecommunications equipment made by firms posing a national security risk.
The order invoked the International Emergency Economic Powers Act, which gives the president the authority to regulate commerce in response to a national emergency that threatens the United States. It directs the Commerce Department, working with other government agencies, to draw up an enforcement plan by October.
Members of Congress said Trump's order was squarely aimed at Chinese companies like Huawei, which generated $93 billion in revenue last year and is seen as a national champion in China.
"China’s main export is espionage, and the distinction between the Chinese Communist Party and Chinese ‘private-sector’ businesses like Huawei is imaginary," Republican Senator Ben Sasse said.
ENTITY LIST
Soon after the White House announced the order had been signed, the Commerce Department said it had added Huawei and 70 affiliates to its so-called Entity List - a move that bans the telecom giant from buying parts and components from U.S. companies without U.S. government approval.
U.S. officials told Reuters the decision would make it difficult, if not impossible, for Huawei, the largest telecommunications equipment producer in the world, to sell some products because of its reliance on U.S. suppliers. It will take effect in the coming days.
Commerce Secretary Wilbur Ross said in a statement Trump backed the decision that will "prevent American technology from being used by foreign owned entities in ways that potentially undermine U.S. national security or foreign policy interests."
With Huawei on the Entity List, U.S. suppliers will need to apply for licenses to provide the Chinese company with anything subject to U.S. export control regulations. Obtaining such licenses will be difficult because they will have to show the transfer of items will not harm U.S. national security, said John Larkin, a former export control officer in Beijing for the Commerce Department.
The United States in January unsealed a 13-count indictment against Huawei accusing the company and its chief financial officer of conspiring to defraud global financial institutions by misrepresenting Huawei's relationship with a suspected front company that operated in Iran.
The indictment was unsealed a month after CFO Meng Wanzhou was arrested in Canada on a U.S. warrant for her role in the alleged fraud. Meng, who maintains her innocence, is fighting extradition.
5G NETWORKS
Reuters reported on Tuesday that Trump was expected to sign his long-awaited executive order this week. The order does not specifically name any country or company, but U.S. officials have previously labeled Huawei a "threat".
The United States has been actively pushing other countries not to use the Chinese company's equipment in next-generation 5G networks that it calls "untrustworthy." In August, Trump signed a bill that barred the U.S. government from using equipment from Huawei and another Chinese provider, ZTE Corp.
ZTE was added to the Commerce Department's Entity List in March 2016 over allegations it organized an elaborate scheme to hide its re-export of U.S. items to sanctioned countries in violation of U.S. law.
The restrictions prevented suppliers from providing ZTE with U.S. equipment, potentially freezing the company's supply chain, but the restrictions were suspended in a series of temporary reprieves, allowing the company to maintain ties to U.S. suppliers until it agreed to a plea deal a year later.
The status of Huawei and ZTE has taken on new urgency as U.S. wireless carriers rollout 5G networks.
While the big wireless companies have already cut ties with Huawei, small rural carriers continue to rely on both Huawei and ZTE switches and other equipment because they tend to be cheaper. Trump's order applies to future purchases and does not address existing hardware, officials said Wednesday.