Written by Hosuk Lee-Makiyama, Director of the European Centre for International Political Economy and Fellow at the Department of International Relations at the London School of Economics and Robin Baker, Research Associate at the London School of Economics.
Sanctions and embargoes are precarious policy tools that can lead to inadvertent consequences without careful targeting, planning and coordination. In the absence of focussed application, Washington’s attempts to break China’s 5G dominance may have helped Beijing to strengthen its grip on the sector. Meanwhile, US government agencies are promoting alternative technologies that have opened a back door for sanctioned entities to enter the US market.
Consecutive US administrations have voiced concerns over the likes of Huawei and ZTE — particularly over their obligation to conduct surveillance on behalf of Chinese authorities under the country’s National Security Law. The US government has unleashed a raft of sanctions, not least to curb China’s commercial successes in European and Asian 5G markets.
Huawei — China’s most successful network equipment vendor — has been subject to the full weight of US sanctions. It seems irrelevant that the quasi-private conglomerate has far fewer ties to China’s military or ruling party than outright state-owned companies like ZTE.
The US National Defense Authorization Act (NDAA) codified an informal ban on Huawei radio units in US networks. Most importantly though, the US Department of Commerce designated Huawei to its ‘Entity List’ of embargoed companies in May 2019.
This designation continues to prohibit all US firms and their affiliates from supplying Huawei with goods, services and intellectual property without a government-issued waiver. Huawei has been obstructed from sourcing vital components — like chipsets and virtualisation software — from US suppliers.
By contrast, ZTE — the less successful and self-professed state-owned vendor with military links — has dodged the brunt of US sanctions. ZTE and other state-owned enterprises with stronger ties to Beijing evaded the Entity List after the Chinese government negotiated with Washington on their behalf. The US Treasury does not consider ZTE a ‘Chinese Military Company’, despite the vendor being open about its ties to the People’s Liberation Army. As a result, ZTE continues to enjoy unfettered access to US technology, suppliers and financial markets.
Observing consequences, it must be acknowledged that the NDAA has had virtually no effect on the current or future security of US mobile networks. The legislation is limited to five Chinese tech firms and both of the mobile network vendors it covers have been de facto banned since a US House Intelligence Committee report in 2012.
Elsewhere, the inconsistent and contradictory application of sanctions has led to some paradoxical market outcomes. Huawei is now increasingly reliant on its home market, where state-owned operators award 90 per cent of tenders to domestic firms.
Aside from its carrier division, Huawei’s consumer device business has been particularly affected by its Entity List designation. With limited access to high-density chipsets and the Android ecosystem, the tech giant was forced to offload its smartphone brand, Honor, to state-backed buyers in September 2021.
State funds have also tried to wrestle away the firm’s highly profitable cloud and enterprise business to create a Chinese version of the US technology giant, IBM. In response to its place on the Entity List, Huawei has since intensified its own chip production as it attempts to curtail its dependency on Western suppliers.
The biggest beneficiary of US 5G sanctions seems to be ZTE, a Chinese state-owned enterprise with military origins. ZTE’s revenue increased by 14 per cent last year, propelled by local 5G rollouts, a burgeoning consumer business and the relative demise of its competitor Huawei. Recently, the firm’s Hong Kong share price briefly leapt by 60 per cent after it completed five years of US probation for an earlier criminal offence.
Sanctions have also prompted some expected, but no less troubling, consequences. Beijing has so far refrained from taking retaliatory measures against Microsoft and Apple. But Scandinavian vendors Ericsson and Nokia — ‘trusted Western alternatives’ in US diplomatic parlance — are being squeezed out of China’s 5G tenders. It remains to be seen whether their businesses can remain viable without access to half of the world market.
There are other examples of disjointed US policy on 5G. In parallel with sanctions, the US government is championing ‘Open RAN’. This refers to efforts to build 5G radio access networks with off-the-shelf PC parts, as opposed to the integrated solutions offered by established vendors like Huawei, ZTE, Ericsson, Nokia or Samsung. Open RAN may offer a market opening to Silicon Valley’s PC and cloud giants in a sector otherwise absent of US competitors.
Problematically though, US government subsidies and policy support are directed to one specific industry consortium — the O-RAN Alliance. In addition to its ‘Western’ membership, the Alliance comprises ZTE and other Chinese state-owned enterprises, including six entities under US sanctions.
Common product development and the cross-licensing of patents violate the sanctions imposed on these entities. Nokia temporarily halted its O-RAN Alliance participation for this reason in September 2021. But thanks to the US government’s non-intervention, knowledge transfers from traditional telecommunications companies to China’s military contractors continue unabated.
On balance, US sanctions have undermined their stated objectives. Sanctions are not just penalties on adversaries, but precision instruments that are supposed to facilitate specific outcomes. US sanctions have not only failed to curb China’s 5G dominance but have assisted Beijing in consolidating its power over the industry.
Washington’s desire for indigenous vendors is even facilitating an alternative route for Chinese players to achieve what even Huawei could not — to finally break into the much-coveted US market.