WASHINGTONThe Commerce Departments efforts to tighten the noose on Huawei Technologies Co. is facing a formidable obstacle: the Pentagon.Commerce officials have withdrawn proposed regulations making it harder for U.S. companies to sell to Huawei from their overseas facilities following objections from the Defense Department as well as the Treasury Department, people familiar with the matter said.The Pentagon is concerned that if U.S. companies cant continue to ship to Huawei, they will lose a key source of revenuedepriving them of money for research and development needed to maintain a technological edge, the people said. The semiconductor industry has pressed that argument in talks with government officials.
Defense Secretary
Mark Esper
was asked about the concern during an appearance Friday at the Center for Strategic and International Studies in Washington.
We have to be conscious of sustaining those [technology] companies supply chains and those innovators, Mr. Esper said. Thats the balance we have to strike.
The Treasury Department wanted to make sure that Secretary Steven Mnuchin had a chance to weigh in, said one of the people. Cabinet officials are expected to meet on Huawei and other China issues in the coming weeks.
The splits within the Trump administration on how to deal with Huawei show the difficulty of confronting China on technology without harming U.S. companies.
People in Congress and the administration who are skeptical over China have been pushing to limit sales to Huawei, and some are calling for Washington to subsidize U.S. companies working on next-generation 5G wireless technology because of how much Beijing has subsidized Huawei.
The administration is exploring how it could help companies produce hardware that could compete with Huawei on 5G within 18 months, a senior administration official said. The talks include government and corporate representatives from Japan and other democratic countries, the official said.
That would help the U.S. persuade other nations, including the U.K. and Germany, to bar Huawei equipment from their networks, the official said. The U.K. is expected to decide next week on whether to ban use of Huawei equipment, which the U.S. considers a security risk.
In almost every area of fifth-generation technology, the U.S. is the leader, said the senior official, who added that Huaweis competitors were kneecapped by China through its subsidy and trade practices.
In an interview with The Wall Street Journal, Huaweis Ren Zhengfei discusses how his company will navigate the trade war, concerns over whether its equipment could be used to spy for Beijing and his road trip across America. Photo: Anthony Kwan for The Wall Street Journal
American officials have been touring the world trying, with limited success, to have foreign governments block local network operators from using equipment from Huawei in their 5G networks. The U.S. government argues that Huawei is beholden to the Chinese government and that its equipment could be used for espionage, a charge Huawei denies.
While the Trump administration is united on trying to block the expansion of Huawei internationally, it is sharply divided over how to deal with the company domestically. There is widespread frustration within the administration that a move in May to place the company on the Commerce Departments blacklist didnt have much of an effect as U.S. companies figured out ways to keep supplying Huawei.
If chips and other electronics are produced overseas and contain less than 25% U.S.-made content subject to export restrictions, those goods can be shipped license-free to Huawei.
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Recently, the Commerce Department sent to the Office of Management and Budget a rule that would reduce that percentage to 10% when it comes to Huawei, said administration officials, which would sharply limit the items that U.S. companies could sell without an export license.
OMB then circulated the rule to agencies for comment, and the Defense Department objectedit nonconcurred, in regulatory jargon. The Huawei rule required the State, Commerce, Defense and Energy departments to sign on, with the Treasury Department also getting a say. Generally, agencies proposing rules informally clear away any objections before submitting proposals to OMB.
After the Pentagons objection, the Commerce Department pulled the rule back from OMB, the people familiar with the matter said. Pentagon officials believe the change would harm U.S. companies, as do some officials at the Commerce Department, which is split internally on the proposed rule. Huawei is an enormous customer for U.S. high-tech firms. The semiconductor manufacturer
Micron Technology Inc.,
for instance, said in its 2019 annual report that Huawei accounts for 12% of its revenue.
If those companies cant continue to ship to Huawei, Pentagon officials feared, the firms would fall behind economically and not have the funds to invest heavily in research and development, according to the people.
Mr. Espers comments reflected at least in part the Pentagons traditional reliance onand support forthe financial health and innovative abilities of its more than 50,000 supplier firms. About a third of the Pentagons $738 billion budget is spent on procurement and research, much of that going to military suppliers that make up what officials call the defense industrial base.
A 2018 Pentagon report, however, found that those suppliers face deep challenges and shortcomings. The report cited the rise of single and sole source suppliersas well as fragile suppliers near bankruptcy and entire industries near domestic extinction.
The deficiencies threaten the Department of Defenses ability to be ready for the fight tonight, and to retool for great power competition, the 2018 report found.
The Trump administration formed a governmentwide task force led by Pentagon officials to find ways to improve the climate and outlook for companies seen as vital to national security.
A spokesman for OMB said the agency doesnt now have the proposed rule. OMB cannot speculate on the position of other agencies on any particular rule-making, the spokesman said.
A Pentagon spokeswoman said the agency is aware of Commerces proposed rule change but wouldnt prematurely discuss ongoing interagency collaboration. The Treasury Department declined to comment.
The halt in efforts to restrain Huawei could turn out to be temporary, although some government officials believe that it will be long-lasting unless the Commerce Department revamps the rule. It was proposed as an interim final rule, meaning that it could go into effect without a prior comment period. The semiconductor industry has lobbied to kill the rule or at least to have a formal comment period before it goes into effect.
In December, the Semiconductor Industry Association wrote Commerce Secretary Wilbur Ross to ask that at minimum the industry be allowed to provide information on the harmful impacts to the U.S. economy and technology leadership before the rule is published.
At the World Economic Forum in Davos, Switzerland, this week, Mr. Ross told Bloomberg News that the rules are works in progress that will come out near term.
A spokesman for Mr. Ross had no immediate comment on the regulations. If or when we have something to announce, we will do so, the spokesman said.
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—Gordon Lubold contributed to this article.
Write to Bob Davis at bob.davis@wsj.com
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