The Biden administration is divided over whether to add Chinese smartphone maker Honor Device Co. Ltd. to an export blacklist due to past connections with Chinese tech company Huawei. This case illustrates the difficulties in drawing lines related to national security, as the United States continues to refine its export control regime.
According to a Washington Post article, the Biden administration is split over the decision on whether Honor poses a national security risk and should be included on the Entity List (being on the list would make it difficult for the company to import inputs from the United States and perhaps from other countries too). Officials at the Pentagon and the Energy Department seem to believe it does, and therefore support adding the company to the list, but officials at the Commerce Department and State Department disagree. The question is now in the hands of the top-level officials of the four agencies, with President Biden making the decision if necessary.
This fight has been brewing for some time now. Last month, China Task Force Chairman Michael McCaul and 13 members of the House Foreign Affairs Committee sent a letter to the Commerce Department asking them to put Honor on the Entity List. In the letter, McCaul and his colleagues said that “Honor was sold to a PRC state-led consortium, including majority ownership by the Shenzhen government,” which “gave it access to the semiconductor chips and software it relied on and would have presumably been blocked had the divestiture not gone through.” The letter noted that “[t]he same concerns about technology exports to Honor when it was part of Huawei should apply under its current state-backed ownership structure,” and called for action before “the CCP’s novel Party-state economy can outmaneuver U.S. sanctions.” A Commerce Department spokesman noted in response that it "is continually reviewing available information to identify potential additions to the Entity List."
In addition, Rep. W. Gregory Steube (R-FL) introduced a bill back in March entitled “Keeping Huawei on the Entity List Act” that would would require the Commerce Department to add Honor to the Entity List. The bill has ten co-sponsors and was referred to the House Committee on Foreign Affairs.
Within Commerce, the End-User Review Committee (ERC) is responsible for determining whether to add to, to remove from, or otherwise amend the Entity List. The ERC is composed of representatives of the Departments of State, Defense, Energy, and Commerce, and others, and is chaired by Commerce. Any agency participating in the ERC may make a proposal to add a new party to the Entity List. The ERC will then vote on the proposal within 30 days in most cases. A majority vote of the ERC is required to add a party to the Entity List. A party may be added if it acts contrary to the national security or foreign policy interests of the United States.
In an interview with the Global Times, a Chinese analyst said that “[t]he proposal is totally unreasonable” because Honor is just a smartphone brand now, and “[the proposal] aims to further stir up hostility between China and the US.” Paul Triolo, who leads global technology policy practice in Eurasia Group, also said “it’s pretty hard to make the case” that Honor’s phone manufacturing poses a national security threat.
Honor was created in 2011 to manufacture Huawei’s low- to mid-end phone brand, and later became an independent operation in 2013. It was sold to another company in 2020 after the U.S. put Huawei on the Entity List and cut off its access to certain inputs.
Starting in 2019, the Commerce Department listed Huawei and over 100 of its non-U.S. affiliates on the Entity List for presenting risks to national security or the foreign policy interests of the United States, in particular, violating the U.S.-led Iran sanctions. Since 2019, the United States has tightened export controls applied to Huawei and its affiliates, including tougher rules governing foreign products using U.S. technology, software or equipment. As a result, it has become more difficult for Huawei to obtain necessary chips for phone manufacturing as well as some apps used on the Android operating system.
Honor phone sales accounted for a quarter of Huawei’s phone business and were hit hard by U.S. sanctions. On November 17, 2020, Huawei completely sold the Honor business assets to Shenzhen Zhixin New Information Technology Co. for a reported $15 billion. Huawei said that “[t]he move has been made by Honor’s industry chain to ensure its own survival. Over 30 agents and dealers of the Honor brand first proposed this acquisition.” A Wall Street Journal report described the deal as “throwing a lifeline to suppliers and vendors of Honor, while potentially setting it up to become an early customer of Huawei’s new line of smartphone software.” While there was a chance the U.S. could extend the ban to the new business, at the time it was deemed unlikely because the U.S. concerns about Huawei had been mostly over its telecom business and role in 5G development.
The buyer of Honor was a new company that was 98.6% owned by Shenzhen Smart City Technology Development Group Co., a unit of the Shenzhen government. Its shareholders also include (link in Chinese) more than three dozen Chinese entities that used to be Honor’s agents and dealers. Chinese media (link in Chinese) called the sale a “collective rescue of the entire supply chain, agents and deals,” because if Honor fails, its suppliers and deals will also face a great deal of impact. After the sale, Honor was able to work with U.S. chip makers such as Intel and Qualcomm to manufacture its new phone lines, although that would be at risk if it is put on the Entity List.