The United States Department of Defense has halted the sale of all smartphones, routers, modems, and other hardware that contains any equipment manufactured by Huawei or ZTE. The order affects all of the stores on various Pentagon military bases and covers both the initial hardware and “adjacent products.”
“These devices may pose an unacceptable risk to the department’s personnel, and mission,” Pentagon spokesperson Major Dave Eastburn told Reuters. The orders are unsurprising if you’ve followed recent news about either company, though the justifications for the orders differs. In Huawei’s case, it’s the latest in a series of security decisions by the US government that have identified Huawei equipment and hardware as a potential threat to US security. We at ET tend to see this issue a bit differently; our Ryan Whitwam doesn’t think the bans are justified, while I’m personally more inclined to trust the national security determination and to assume that it’s based on information that hasn’t been made publicly available because doing so would tip our hand on why we know and how we know it.
The ZTE ban is more straightforward. Last month, the US government banned all US corporations from doing any business with ZTE whatsoever. The ban stems from an investigation into ZTE’s business practices, which found that the company had broken US law and misled US investigators when the firm bought US products and then did business with Iran and North Korea. As part of its punishment, ZTE was expected to discipline some 35 employees for their roles in the criminal enterprise in additional to firing four senior employees. The company did fire its senior employees, but refused to penalize the other 35. The US blanket ban on doing business with ZTE is the result, and a similar ban could be incoming for Huawei. Last week, the US announced it was investigating whether Huawei did business with Iran in violation of US sanctions.
Devices like the ZTE Max XL won’t be possible without US suppliers.
These blanket bans on all companies doing business are some of the heaviest weapons in the United States trade arsenal. There is no way to build a smartphone without at least some components from US suppliers. Business leaders have indicated that the bans could kill ZTE outright. And if Huawei was found to be in violation of US sanctions against Iran, the US could theoretically levy equally heavy penalties against the company — though to be clear, the penalties levied against ZTE are for violating its agreement with the US after its actions were discovered. It’s not clear if the Trump administration would choose to hit Huawei with such heavy penalties immediately or if, like ZTE, the ban would kick in only if the company refused to comply with the terms of its original punishment. (ZTE’s decision to give the employees in question bonuses instead of penalties might have had something to do with the United States’ response).
Thus far, China’s remarks on the ZTE scenario have been muted. If Huawei, a significantly larger company than ZTE, is hit with a similar penalty in the future, that could change.