American Quislings

U.S. Tech Companies Sidestep a Trump Ban, to Keep Selling to Huawei

By Paul Mozur and Cecilia Kang

A Huawei billboard in Shanghai. The deals with United States companies will help Huawei continue to sell its smartphones and other products.

SHANGHAI — United States chip makers are still selling millions of dollars of products to Huawei despite a Trump administration ban on the sale of American technology to the Chinese telecommunications giant.
Industry leaders including Intel and Micron have found ways to avoid labeling goods as American-made, said the people, who spoke on the condition they not be named because they were not authorized to disclose the sales.
Goods produced by American companies overseas are not always considered American-made. 

The components began to flow to Huawei about three weeks ago, the people said.
The sales will help Huawei continue to sell products such as smartphones and servers, and underscore how difficult it is for the Trump administration to clamp down on companies that it considers a national security threat, like Huawei. 

They also hint at the possible unintended consequences from altering the web of trade relationships that ties together the world’s electronics industry and global commerce.
The Commerce Department’s move to block sales to Huawei, by putting it on a so-called entity list, set off confusion within the Chinese company and its many American suppliers, the people said. Many executives lacked deep experience with American trade controls, leading to initial suspensions in shipments to Huawei until lawyers could puzzle out which products could be sent. 

Decisions about what can and cannot be shipped were also often run by the Commerce Department.

American companies like Intel sell technology supporting current Huawei products until mid-August.

American companies may sell technology supporting current Huawei products until mid-August. 

But a ban on components for future Huawei products is already in place. 

It’s not clear what percentage of the current sales were for future products. 

The sales have most likely already totaled hundreds of millions of dollars, the people estimated.
While the Trump administration has been aware of the sales, officials are split about how to respond, the people said. 

Some officials feel that the sales violate the spirit of the law and undermine government efforts to pressure Huawei, while others are more supportive because it lightens the blow of the ban for American corporations. 

Huawei has said it buys around $11 billion in technology from United States companies each year.
Intel and Micron declined to comment.
“As we have discussed with the U.S. government, it is now clear some items may be supplied to Huawei consistent with the entity list and applicable regulations,” John Neuffer, the president of the Semiconductor Industry Association, wrote in a statement on Friday.
“Each company is impacted differently based on their specific products and supply chains, and each company must evaluate how best to conduct its business and remain in compliance.”
In an earnings call Tuesday afternoon, Micron’s chief executive, Sanjay Mehrotra, said the company stopped shipments to Huawei after the Commerce Department’s action last month. 

But it resumed sales about two weeks ago after Micron reviewed the entity list rules and “determined that we could lawfully resume” shipping a subset of products, Mr. Mehrotra said. 

“However, there is considerable ongoing uncertainty around the Huawei situation,” he added.
A spokesman for the Commerce Department, in response to questions about the sales to Huawei, referred to a section of the official notice about the company being added to the entity list, including that the purpose was to “prevent activities contrary to the national security or foreign policy interests of the United States.”

The Idaho-based Micron competes with South Korean companies like Samsung to supply memory chips that go into Huawei’s smartphones.

A senior administration official said that after the Commerce Department put Huawei on the entity list, the Semiconductor Industry Association sent a letter to the White House asking for waivers for some companies to allow them to continue selling components to Huawei. 

But the administration did not grant the waivers, he said, and the companies then found what they assert is a legal basis for continuing their sales.
Administration officials would like to address this issue, he said, but they do not plan to do so before the G-20 summit in Japan at the end of this week. 

Mr. Trump’s top priority is to discuss the general trade dispute with Xi Jinping and get the two sides to resume trade talks that have dragged on since early 2018, the official said.
The fate of Huawei, a crown jewel of Chinese innovation and technological prowess, has become a symbol of the economic and security standoff between the United States and China. 

Chinese companies like Huawei, which makes telecom networking equipment, could intercept and secretly divert information to China. 

Xi Jinping and President Trump are expected to have an “extended” talk this week during the Group of 20 meetings in Japan, a sign that the two countries are again seeking a compromise after trade discussions broke down in May. 

After the talks stalled, the Trump administration announced new restrictions on Chinese technology companies.

Along with Huawei, the administration blocked a Chinese supercomputer maker from buying American tech, and it is considering adding the surveillance technology company Hikvision to the list.
Kevin Wolf, a former Commerce Department official and partner at the law firm Akin Gump, has advised several American technology companies that supply Huawei. 

He said he told executives that Huawei’s addition to the list did not prevent American suppliers from continuing sales, as long as the goods and services weren’t made in the United States.

The SK Hynix plant in Icheon, South Korea. American companies are worried about losing market share to foreign rivals.

A chip, for example, can still be supplied to Huawei if it is manufactured outside the United States and doesn’t contain technology that can pose national security risks. 

But there are limits on sales from American companies. 

If the chip maker provides services from the United States for troubleshooting or instruction on how to use the product, for example, the company would not be able to sell to Huawei even if the physical chip were made overseas, Wolf said.
“This is not a loophole or an interpretation because there is no ambiguity,” he said. 

“It’s just esoteric.”
After this article was published online on Tuesday, Garrett Marquis, the White House National Security Council spokesman, criticized the companies’ workarounds. 

He said, “If true, it’s disturbing that a former Senate-confirmed Commerce Department official, who was previously responsible for enforcement of U.S. export control laws including through entity list restrictions, may be assisting listed entities to circumvent those very enforcement mechanisms.”
Wolf said he does not represent Chinese companies or firms on the entity list, and he added that Commerce Department officials had provided him with identical information on the scope of the list in recent weeks.
In some cases, American companies aren’t the only source of important technology, but they want to avoid losing Huawei’s valuable business to a foreign rival. 

For instance, the Idaho-based Micron competes with South Korean companies like Samsung and SK Hynix to supply memory chips that go into Huawei’s smartphones. 

If Micron is unable to sell to Huawei, orders could easily be shifted to those rivals.
Beijing has also pressured American companies. 

This month, the Chinese government said it would create an “unreliable entities list” to punish companies and individuals it perceived as damaging Chinese interests. 

The following week, China’s chief economic planning agency summoned foreign executives, including representatives from Microsoft, Dell and Apple. 

It warned them that cutting off sales to Chinese companies could lead to punishment and hinted that the companies should lobby the United States government to stop the bans. 

The stakes are high for some of the American companies, like Apple, which relies on China for many sales and for much of its production.

A FedEx warehouse in Kernersville, N.C. “FedEx is a transportation company, not a law enforcement agency,” the company said in a complaint against the government.

Wolf said several companies had scrambled to figure out how to continue sales to Huawei, with some businesses considering a total shift of manufacturing and services of some products overseas. 

The escalating trade battle between the United States and China is “causing companies to fundamentally rethink their supply chains,” he added.
That could mean that American companies shift their know-how, on top of production, outside the United States, where it would be less easy for the government to control, said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics.
“American companies can move some things out of China if that’s problematic for their supply chain, but they can also move the tech development out of the U.S. if that becomes problematic,” he said. 

“And China remains a large market.”
“Some of the big winners might be other countries,” Mr. Chorzempa said.
Some American companies have complained that complying with the tight restrictions is difficult or impossible, and will take a toll on their business.
On Monday, FedEx filed a lawsuit against the federal government, claiming that the Commerce Department’s rules placed an “impossible burden” on a company like FedEx to know the origin and technological makeup of all the shipments it handles.
FedEx’s complaint didn’t name Huawei specifically. 

But it said that the agency’s rules that have prohibited exporting American technology to Chinese companies placed “an unreasonable burden on FedEx to police the millions of shipments that transit our network every day.”
“FedEx is a transportation company, not a law enforcement agency,” the company said.
A Commerce Department spokesman said it had not yet reviewed FedEx’s complaint but would defend the agency’s role in protecting national security.

Microsoft, Intel, IBM Push Back on China Cybersecurity Rules

Beijing wants foreign tech companies to hand over their source code.By EVA DOU

Visitors used a laptop behind a security guard at the Global Mobile Internet Conference in Beijing in April 2015. The Chinese government plans to implement new cybersecurity rules by next summer.

BEIJING—Tough new Chinese cybersecurity rules are providing a rare, behind-the-scenes look at a regulatory skirmish between U.S. technology companies and Beijing.
China is moving to require software companies, network-equipment makers and other technology suppliers to disclose their proprietary source code, the core intellectual property running their software, to prove their products can’t be compromised by hackers.
Tech companies are loath to offer up their source code, saying this will heighten the risk of their code falling into the hands of rivals or malefactors—and may not guarantee it is hack-proof.
Microsoft Corp., Intel Corp. and International Business Machines Corp. are among those filing objections.
“Sharing source code in itself can’t prove the capability to be secure and controllable,” Microsoft wrote in comments released by a government cybersecurity committee in November.
“It only proves there is source code.”
Intel said a rule forcing chip makers to disclose the details of their products “would hurt technological innovation and decrease the security level of products.”
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BEIJING’S ONLINE RULES
Some features of China’s new regulations to ensure information technology products are ‘secure and controllable.’

• IT suppliers must provide the software source code running the products, and design details, so authorities can check for security flaws or back doors.
• Product security will be graded on whether the system’s technology is transparent to authorities, how data is stored and processed, and the stability of the supply chain, to economic and political changes.
• IT buyers in China will be ranked into five security classifications that require different levels of IT equipment security.

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The comments were made in a discussion log made public by Technical Committee 260, the national cybersecurity standards maker, as it released technical parameters of its omnibus cybersecurity law adopted Nov. 7.
The committee is rolling out standards for operating systems, microprocessors, office software and other products to comply with the regulations when they go into force in June 2017.
Chinese authorities have said these measures are necessary to guard against foreign espionage tools being embedded in software used here.
They frequently cite claims by former U.S. National Security Agency contractor Edward Snowden that such back doors were routinely built into U.S. technology products sold overseas.
Microsoft, Intel and IBM were the largest U.S. firms to respond to the draft regulations, joining dozens of Chinese companies, government agencies and security experts.
The three U.S. tech giants declined to comment beyond their written statements.
All three have multiple China ventures with local partners and are typically reluctant to publicly challenge Chinese policy.
As such, their written comments, made in Chinese, offer a rare glimpse into how they parry over regulations with Beijing authorities.
Among other things, tech companies are bristling at the level of detail they would be forced to disclose to have their proprietary technologies rated “secure and controllable.”
Microsoft wrote that it believed allowing visitors to view code at its new “Transparency Center” in Beijing should suffice, rather than having to “share source code.”
Technical Committee 260 staffers disagreed, maintaining the original wording and marking the comment “not accepted.”
Microsoft and Intel also raised questions over one security standard that gives a higher ranking to products whose development and delivery can’t be disrupted by “politics,” with Intel requesting clarification.
That complaint was marked “partially accepted,” although political consideration is still in the most recent draft.
IBM said that distinctions should be made between computing services for commercial use, versus services for government applications.
“Computing rooms used purely for commercial cloud computing purposes shouldn’t have to be located within China’s borders,” wrote IBM.
In a written response, Technical Committee 260 staffers said that many sectors touch upon social stability and the public interest.
“It’s not only a pure commercial question.”
Jeremie Waterman, senior director for Greater China at the U.S. Chamber of Commerce in Washington, said there is “deep concern about the IP disclosure requirements.”
But it isn’t clear what recourse U.S. tech companies might have.
Despite any objections, U.S. firms are unlikely to leave China over the cybersecurity requirements because of the importance of the mammoth Chinese market, said James Gong, a senior associate at law firm Herbert Smith Freehills LLP who works with western clients in navigating Chinese law.
“I don’t think they will pull out,” said Mr. Gong.
“I haven’t heard of any company that has decided to leave.”
China has long had cybersecurity standards that weren’t vigorously enforced—but that is likely to change when the nationwide cybersecurity law goes into effect next summer, he said.
Beijing maintains that its security rules apply to domestic and foreign companies equally.
When China passed the cybersecurity law last month, a spokesman for the internet regulator said foreigners who thought the law would favor domestic firms had a “misunderstanding, a biased view.”
But in Technical Committee 260’s discussions, certain government officials argued for the standards to be drafted to favor domestic companies.
“The big trend is called shifting to domestic production,” wrote Guo Qiquan, chief engineer at the China Ministry of Public Security’s Network Security Bureau, in a suggestion that the committee marked “approved.”
“But it can’t be written that way, so one calls it independent and controllable.”