U.S. Is Tightening the Noose on Huawei

Markets reacted calmly to the Trump Administration’s latest escalation in its war on Chinese telecom giant Huawei. Maybe too calmly.

U.S. Commerce Department regulations issued Aug. 17 will in theory prevent Huawei from buying any equipment or software containing any U.S.-originated inputs, without a case-by-case license. That’s kind of a big deal, you might think.

The Shenzhen-based powerhouse vies with Samsung Electronics as a top global handset producer, and has poll position in 5G technology. It’s a major customer for leading tech names from Qualcomm (ticker: QCOM) and Qorvo (QRVO) to Taiwan Semiconductor Manufacturing (TSM). Washington could crush this thriving symbiosis if it really wanted to. China specialist Gavekal Research labeled Commerce’s move a “death sentence for Huawei.”

Investors don’t much care so far. None of Huawei’s blue-chip suppliers sold off much on the news. Stocks of Telefon AB L.M. Ericsson (ERIC) and Nokia (NOK), its prime competitors to build out 5G, didn’t advance. Major share movements were restricted to less widely held names like Taiwanese chip maker MediaTek (2454.Taiwan), which crashed 10% on Tuesday, and rival Chinese phone manufacturer Xiaomi (1810.Hong Kong), which jumped 6%.

Trade war fatigue is one reason for the market apathy, says Mehdi Hosseini, an analyst at Susquehanna International Group. Commerce’s move supersedes a regulation three months ago that turned out to be riddled with loopholes. “The situation is so freaking chaotic that the market is saying, ‘We’re not really going to do anything,” Hosseini says.

Stock traders have grown accustomed to ignoring much worse news over the past few months, observes Matt Gertken, geopolitical strategist at BCA Research. “Last year this would have caused a pretty big sell-off,” he says. “Now we’re injecting economies with so much stimulus that we’re not feeling the pain.”

There may be plenty of pain eventually, though, from the U.S. campaign against Huawei, and the broader tech cold war. While Trump kicked off the hostilities, presumptive Democratic presidential nominee Joe Biden will continue them in similar vein if he wins the U.S. election, Gertken predicts. “A technological cordon on China will involve very big costs to capital intensive industries,” he warns.

At the company level, Washington’s tightening supply noose creates particular dilemmas for Taiwan Semiconductor, the premier global chip manufacturer whose stock has climbed by more than a third this year, Hosseini says. “They are the greatest foundry, but we can’t ignore the impact of more trouble selling to Huawei.”

A Beijing counter-attack could target one of the bull market’s true darlings, Apple (AAPL), which gets a quarter of its revenue from China. “If the U.S. sucker-punches Huawei, Apple would be the obvious choice for retaliation,” Hosseini says.

Chinese leader Xi Jinping will likely hold this card back until after the U.S. election at least, not wanting to antagonize Trump either on his way to term two or to retirement, Gertken says. But like any war, the tech cold war is almost certain to take unpredictable and costly turns. The price may be worth it, but there will be a price.