The next twist in the U.S.-China trade conflict could come Monday, when the U.S. has to figure out what to do about the restrictions it imposed on telecommunications equipment giant Huawei Technologies. Analysts expect the U.S. to delay a hard decision, potentially offering temporary relief for those worried about already-fraught conditions around trade negotiations between the two countries.
The Trump administration in May signed an executive order that banned telecom network gear and services from “foreign adversaries,” widely seen as targeting Huawei. The Commerce Department also added the company to its “entity list,” citing national security concerns in a move that would bar most companies from supplying U.S.-origin technology to the Chinese company. The move roiled the technology supply chain, but the U.S. soon offered a handful of 90-day exemptions, which expire on Monday.
Tariffs have dominated the headlines in recent weeks after President Donald Trump threatened earlier this month to impose 10% tariffs on the remaining $300 billion worth of imports from China, setting off panic about a global recession. Markets got the shortest of reprieves when Trump, citing the Christmas season, decided to delay some of those tariffs until December.
It didn’t last long, with Trump tying the future of a trade deal to the way China handles the pro-democracy protests in Hong Kong, and China, who has wanted tariff threats removed entirely, saying it would retaliate.
But the focus next week will turn to technology and what the U.S. decides to do about Huawei, one of China’s national champions and a key player in the country’s broader development goals. One observer expects the exemptions to be extended.
“We think the temporary general license will be rolled over, with some modifications. There appears to be no consensus within the administration on what the endgame should be with Huawei,” Eurasia Group’s Paul Triolo wrote in an email to Barron’s. “The rollover of the temporary general license provisions will give time for the administration to sort these issues out, without further disruption of mobile telecommunications supply chains and orderly processes at international standards bodies, where Huawei is a major player.”
While Trump has been able to use tariffs to dial the pressure up and down on China, he can’t do that as easily with the entity list. “Bureaucratic management of export decisions cannot be subordinated in the same way as tariffs to Trump’s whim,” writes Eleanor Olcott, China policy analyst at TS Lombard in a note to clients, adding that the decision could have lasting impact on the U.S.-China relationship.
With bipartisan support for a harder line against China, it is unlikely the U.S. would simply remove Huawei from the entity list, but Olcott also doesn’t expect the U.S. to apply a full penalty to Huawei, since that could also hurt major U.S. technology firms. The path of least resistance is probably extending the exemptions—essentially requiring individual licenses for all exports to Huawei—which would let Trump continue to seem tough while giving U.S. suppliers a lifeline, Olcott says.
But Goldman Sachs strategist Dave Kostin was less sanguine. In a note last week, he described Huawei, which represents 18% market share of global smartphone sales, as a major sticking point in trade negotiations. If Monday comes and goes without another extension, Kostin expects retaliation by China, with Huawei’s sales outside of China immediately at risk because most customers won’t want to buy a smartphone from a manufacturer that can’t update its operating system—in this instance Android by Alphabet (GOOGL) unit Google.
U.S. technology stocks could continue to be pawns in the broader trade conflict, with continued volatility the only thing strategists are willing to bet on at this point.