SITUATION UPDATE BRIEF – New US Licensing Requirement Likely to Prompt Retaliation from China Against American Technology Companies

Key Takeaways

• The US Commerce Department has expanded its foreign direct product rule to target Huawei Technologies’ acquisition of American software and equipment that is crucial to the construction of 5G networks. These developments come on the back of wider efforts in Washington to accelerate economic decoupling from China amidst the Covid-19 pandemic.

• Washington’s actions against Huawei feed Beijing’s perceptions of increasing anti-Chinese sentiment associated with the Covid-19 outbreak, which will drive tensions between the two countries. The Chinese government is likely to retaliate, having condemned the actions against Huawei and declared its intention to defend the “legitimate rights and interests” of Chinese firms. This may include China activating its ‘unreliable entity list’, which could result in Chinese authorities utilising a range of nontariff measures (NTMs) to frustrate the operations of American businesses and investors in China.

• Going forward, Washington will continue to restrict Chinese technological innovations given the threat they are deemed to pose to US national security. Tensions are also likely to increase in other areas of relations following provocative manoeuvres by the Chinese in the South China Sea and Beijing’s approval of a new national security law for Hong Kong, contributing to an increasingly challenging business environment for US companies operating in China.

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