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The Thorny Issue of Chinese Businesses and National Security

In 2020, U.S. tech sanctions against China were put into place against Huawei, China’s shining electronics firm. The impact on their ability to compete with companies like Apple and Samsung were immediately handicapped. But since that time, the U.S. has become increasing concerned about the national security threats from China. This has resulted in advancing policies further restricting entry of Chinese technology products into the country. These restrictions took one additional step further this past month with the FCC imposing broad bans on some Chinese products. But whether this approach will pay off in the long run remains to be seen.

The primary issue encouraging government action relates to the relationships these companies have with the Chinese government. In essence, they are subject to Chinese law, which could mean Chinese officials and the military could access private data. Given that privacy violations have been linked to human rights abuses within the country, this concern is not far-fetched. These could pose serious national threats from China against the U.S. But actual privacy violations have yet to be demonstrated, and companies deny such violations would ever occur. As such, these Chinese tech titans describe the U.S. sanctions against China as being unjustified and unfair. And some are choosing to leave the U.S. market altogether.

(Bold has written extensively about the market inequities inherent in doing business with China–read up on it here.)

“The FCC is committed to protecting our national security by ensuring that untrustworthy communications equipment is not authorized for use within our borders, and we are continuing that work here.” – Jessica Rosenworcel, Chair of FCC

Increasing U.S. Tech Sanctions Against China

In terms of national security threats from China, the U.S. has had concerns for many years. In 2018, the U.S. accused memory chip maker, JHICC, of stealing U.S. trade secrets. As such, it imposed sanctions against the company, which crippled it in the process. In 2020, U.S. tech sanctions against China’s Huawei was then imposed for similar worries. And in 2021, additional U.S. policies were announced under the Secure Equipment Act. This legislation authorized the Federal Communications Commission (FCC) to take further actions in an effort to deter national security threats from China. This past month, the FCC acted in this regard, much to the dismay of several Chinese companies.

The recent announcement by the FCC places a ban on the import and sale of a variety of technology equipment. Smartphones, routers, cameras and video surveillance equipment were among the most noted ones listed in the FCC’s restrictions. And the companies cited included Chinese vendors in each of these categories. In addition to Huawei, other U.S. tech sanctions against China-related companies involved ZTE, Hikvision, Dahua, and Hytera. Any of these companies’ products used for public safety measures, government security protections, and/or national security purposes is prohibited. This is simply another effort by the U.S. to further minimize national security threats from China.

“The FCC’s decision will do a great deal to make it more harmful and more expensive for US small businesses, local authorities, school districts, and individual consumers to protect themselves, their homes, businesses and property.” – Response statement by Hikvision

A Benefit and Risk Analysis

From a national security perspective, the FCC’s actions are logical and well-supported by recent events. Within China, video surveillance equipment from Hikvision has been used to oppress Muslim groups including the Uyghurs. Therefore, inappropriate use of such technologies could just as well be utilized as national security threats from China against the U.S. Banning use and entry of these products through U.S. tech sanctions against China reflects a proactive approach. And at the same time, it undermines market success of these firms, which could boost revenues for domestic tech companies. Thus, there are certainly benefits supporting recent policy and legislative actions.

A bunch of silhouettes having a meeting in China
National security threats from China complicate what could be a great trade relationship.

Unfortunately, there are also some risks. The Chinese tech firms being singled out through the FCC’s recent ban suggest these actions hurt the American consumer. ZTE has actually stated it will withdraw from the U.S. market altogether. They claim that without Chinese technology products, competition will be less, which could raise prices and limit supplies. While this may be true on a small scale, it’s not very likely in a broader sense. The larger risks involve a global technology “cold war” where the U.S. and China evolve independently. Huawei has already revived the JHICC memory chip plant in China as part of its renewed market strategies. Domestic companies like Apple are looking beyond China for new supply chains. Depending on how independent markets develop, this could be favorable or unfavorable in the long run.

(More and more Apple products are being manufactured outside of China–read up on this development in this Bold story.)

“The regulations amount to a declaration of full-scale technological economic cold war. The U.S. is forcefully decoupling the entire advanced technology supply chain before China in-sources it.” – Dylan Patel, chief analyst of SemiAnalysis

The Evolving Landscape of National Security

It’s quite evident that we have entered into a cyber-domain of national security among nations. Cybersecurity threats and government-level hacks have become commonplace demanding high-level cybersecurity protections. Typically, these risks occur when hackers access existing networks from outside. But the national security threats from China related to technology equipment are more direct. If this equipment is part of existing networks and electronic infrastructures, they already have the keys to the city. More than anything, this is what is fueling U.S. tech sanctions against China and its companies.

Of course, cybersecurity breaches are just one concern in today’s global landscape. The U.S. and China both are rushing to accelerate their own domestic semiconductor chip manufacturing strengths. If China wins this battle, these will impose even greater national security threats from China. In this regard, the U.S. tech sanctions against China are serving another important purpose. Each restriction and ban make it that much more difficult for Chinese companies to excel in the tech sector. There’s little doubt that this is also playing a role in the latest policy decisions. Hopefully these choices will pay off from both a business and national security perspective.

 

Sometimes businesses are like rose bushes, and need to be pruned to grow. Read more about prune and grow, and Musk’s use of it, in this Bold story.