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The Trump administration has for years sparred with China over tariff threats, technology and the terms of their trade deal. But in a pair of actions last week, the administration escalated those economic tensions in a way that comes close to touching a red line for Beijing: its contentious relationship with Taiwan.

One of the world's leading computer chip makers, Taiwan Semiconductor Manufacturing Co., said Thursday it would build a factory in Arizona, a move heralded by American officials as a first step toward relocating a vital supply chain to the United States.

The next day, the Department of Commerce announced a rule change that could stymie the business Chinese technology giant Huawei does with Taiwan Semiconductor and other global chip manufacturers.

The administration has been working on multiple fronts to isolate Huawei, a major global smartphone brand and the planet's largest producer of the equipment that powers mobile networks. But simultaneously undermining Huawei and bringing Taiwan Semiconductor closer into the American orbit is a one-two punch of industrial policy that would have been unthinkable only a few years ago, one that raises the prospect of a more serious conflict between China and the United States.

Never before has the Trump administration so forcefully challenged Chinese companies' access to Taiwan's high-tech supply chain -- and, by extension, Beijing's influence over the self-governing island democracy, which it claims as part of its territory.

China considers its claim to Taiwan non-negotiable, and it has lashed out at companies and politicians for failing to acknowledge it, even inadvertently.

The administration seems intent on "hitting at targets that are both economically and politically sensitive for Beijing," said Eswar Prasad, a professor at Cornell University.

China's Ministry of Commerce condemned Washington's latest move against Huawei, saying it would do what was necessary to protect the interests of Chinese businesses.

LOOPHOLE

Since the U.S. Commerce Department announced the rule change, industry analysts and executives have highlighted what they said could be a significant workaround.

The rule change bars companies around the world from using U.S. technology to produce or design chips that are sent, either directly or through an intermediary, to Huawei itself. But it does not appear to prevent them from producing chips that would be sent to Huawei's customers or partners, such as contract manufacturers that assemble phones and other devices on Huawei's behalf.

The rule could still disrupt Huawei's business, however, forcing the company or its suppliers to reorganize their operations. And the Commerce Department could revise its rule in the coming months to narrow any loopholes.

"The future of at least a major portion of Huawei's business is now firmly in the hands of the Commerce Department," said Paul Triolo, a technology policy analyst at Eurasia Group.

In an emailed comment, U.S. Commerce Secretary Wilbur Ross, said his department was charged with catching and punishing intermediaries and front companies that circumvent its regulations and that it does so regularly. "Any collusion with Huawei or its affiliates to willfully violate this rule is prohibited, and any party found to be in violation will be barred from further access to U.S. equipment or software," Ross said.

Huawei this week declined to answer reporters' questions about the amended rule, although it acknowledged that its business would "inevitably" be affected.

The company appears to have been preparing for the possibility of being cut off from key suppliers. As of the end of 2019, Huawei had stockpiled $23.5 billion worth of finished products, components and raw materials, according to its annual report, an increase of nearly three-fourths from a year before.

While the practical effects of the new rule remain unclear, the political message sent by last week's announcements was unambiguous: The Trump administration is eager to thwart China's efforts to dominate critical technologies and is turning to Taiwan as a new point of leverage.

The United States has also grown more active in jockeying against China to build up and control access to the technological components that power everything from smartphones to missiles.

TIGHTENING RESTRICTIONS

Last May, the Commerce Department added Huawei to its "entity list," requiring American companies to obtain a license before they can sell to the Chinese firm. The administration has since issued a series of other restrictions on collaborating and trading with Chinese technology companies.

The Commerce Department said the latest rule change was meant to thwart Huawei's efforts to get around past restrictions. To lessen its reliance on U.S. suppliers, Huawei has sought to meet more of its semiconductor needs in-house. But to mass-produce those chips to its specifications, Huawei still needs Taiwan Semiconductor and other foundry firms, which rely extensively on software and equipment made by U.S. providers.

Taiwan has long been of keen political significance for both Beijing and Washington. It is currently governed by a party that is suspicious of China's ruling Communist Party and favors closer ties to the United States.

In recent years, Taiwan's status as a global capital of semiconductors has added to its strategic importance. Taiwan Semiconductor makes microchips for big global names across the tech world, including Apple, Qualcomm and Huawei's chip subsidiary, HiSilicon.

"You have the best semiconductor manufacturer in the world, and China thinks it owns the land it sits on," said Stacy Rasgon, a semiconductor analyst with the research firm Sanford C. Bernstein. "It shows just how dependent everyone is on [Taiwan Semiconductor]."

Business on 05/20/2020

Print Headline: U.S. deals with Taiwan firm amid tech fight with China

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