Tougher Huawei Restrictions Stall After Defense Department Objects

WASHINGTON — The Trump administration has temporarily shelved a proposed rule change that would further restrict American sales to Huawei, the Chinese telecom giant, after some officials in the Defense Department and other agencies argued that the measure, which was intended to protect national security, could actually undermine it, according to people familiar with the matter.

The rule change, which was being reviewed by multiple government agencies, would close a loophole that allowed technology companies like Intel and Micron to continue shipping chips, software and other products to Huawei despite a ban that prevented the Chinese company from buying some American products

Some government officials have objected to the tougher restrictions, arguing it could discourage the use of American components abroad, weakening American firms and the country’s technological competitiveness.

The rule has been withdrawn from the Office of Management and Budget, effectively putting the tighter limits on hold. The change, along with other China technology issues, will be discussed in an upcoming meeting of President Trump’s top advisers, though a date has yet to be set, one of the people said.

The measure is the latest in a series of steps the Trump administration has taken to combat what it describes as a pressing security threat: China’s acquisition of advanced technologies that could give the country both a commercial and a military edge. Many of those efforts have focused on Huawei, which sells global telecom equipment that American officials fear will give Beijing new channels for control and surveillance. Huawei says its networks are secure and that it does not spy for the Chinese government.

Tensions between the United States and China have eased since the countries concluded a Phase One trade deal. But the fate of Huawei, and the American companies that supply it, continues to hang in the balance. Last May, the Trump administration placed Huawei on a United States blacklist and moved to cut off shipments of certain goods, software and technology to the Chinese firm. In order to keep selling certain products to Huawei, companies had to apply for — and obtain — a special license.

The restrictions threatened to cut off lucrative sales for a number of American tech companies that supplied components to Huawei, including Intel, Micron and Google. Some firms, eager to continue selling to Huawei, took advantage of a loophole that allowed them to sell products made outside the United States to Huawei without a government license, as long as the products contained less than 25 percent of certain types of sensitive American content.

The proposed measure, which only applies to Huawei, would lower that threshold from 25 percent to 10 percent. It would also expand the rule so that all types of American content would count toward that 10 percent threshold.

Such a change would expand the rule’s reach beyond sensitive types of technology to include American software, chips and other components that are widely available and that Huawei could easily purchase from Taiwanese, Korean and Japanese manufacturers instead.

The exceptions to the existing rules have allowed Huawei to continue purchasing many of the components it needs to make its telecom networks and smartphones from American suppliers. That has allowed Huawei — the third largest purchaser of chips globally after Apple and Samsung — to continue growing and boost its revenue, defying expectations within the tech industry and in Washington. Huawei said its sales in 2019 topped $120 billion, representing 18 percent growth over the year before — less than its initial target, but not by much.

Speaking at the World Economic Forum in Davos, Switzerland on Tuesday, Huawei chief executive Ren Zhengfei, said he expected the United States to continue escalating its campaign against Huawei, but that he was “confident we can survive even further attacks.”

Some trade experts say that the administration should have anticipated that business with Huawei would continue, since American controls on exports are designed to target only sensitive material and technologies, and otherwise allow commerce to flow unheeded.

But some administration officials, including Commerce Secretary Wilbur Ross, have been surprised that placing Huawei on the entity list did not halt more business with the company.

In an interview at Davos on Thursday, Mr. Ross said Huawei had been “encouraging American companies to flaunt U.S. laws,” attracting the Commerce Department’s attention. He added that revisions to the rules were “works in progress that will come out in the near term.”

The rule, which was being considered by officials at the Commerce, Defense, Treasury, State and Energy departments, was designed to be implemented before giving industry a chance to comment on it.

The Commerce Department has also been weighing a separate rule change that would expand its jurisdiction over items manufactured overseas with American technology. People familiar with the planning said that policymakers were potentially considering a far more expansive measure, but that the rule was still in the drafting stage.

The proposed measures have not been made public, and their exact scope is unclear. But reports of their existence have generated panic among companies most directly affected and parts of the defense industry, said current and former government officials.

American tech companies have complained that the changes would backfire, eroding the country’s technological advantages rather than protecting them. Those changes could be particularly devastating for some segments of the semiconductor industry, where Huawei can switch to purchasing products from South Korea, Japan, Taiwan or elsewhere instead.

In a Dec. 5 letter to Mr. Ross, which was viewed by The New York Times, a collection of industry groups, including the Semiconductor Industry Association and the National Association of Manufacturers, wrote that the changes could reduce innovation and competitiveness in American industry, cause customers abroad to stop purchasing American technology, and accelerate the offshoring of manufacturing and research.

“While we fully understand the paramount importance of maintaining our national security, we believe these actions would have serious negative consequences for U.S. economic leadership and, ultimately, U.S. national security,” the letter said.

Within government the battle lines are blurred. Some defense officials have concerns about how the rule change will impact key military suppliers. Other senior defense officials believe the national security case for cutting Huawei off from key American components is clear and overrides other concerns, said current and former officials.

Officials said the disagreements could ultimately be resolved in the next few weeks and that the rule could still move forward.

A Pentagon spokeswoman, Sue Gough, said the department was aware of Commerce’s proposed rule change, but “will not prematurely discuss ongoing interagency collaboration.”

A spokesman for the Commerce Department said “if or when we have something to announce, we will do so.”

Julian E. Barnes contributed reporting from Washington. Raymond Zhong contributed reporting from Beijing.