COMMENTARY: Tensions Rising as U.S. Considers Actions Against More Chinese Companies

Beyond Huawei, Trump administration reportedly considering a blacklist against facial- and voice-recognition artificial intelligence firms, escalating battle over technology.

Author: Mark Melnicoe   

After previous high-profile moves against Chinese technology companies, the Trump administration reportedly is taking new actions that seem sure to ratchet tensions even higher between the two nations.

The administration is broadening its targets after its recent order that bans Huawei (privately held) from the U.S. market and prohibits export of American components to the Chinese telecom giant. Numerous media reports are saying the U.S. now plans to deny exports to several Chinese surveillance companies.

The Commerce Department reportedly is exploring at least four regulatory actions under the Export Control Reform Act. The law has been a longtime source of Chinese irritation, as it's often used to deny exports to China on national security grounds. This happens with so-called dual-use technology – which may be intended for civilian use but which also has military applications.

One person close to the deliberations told Politico the actions appear to be "a direct response to the civilian-military fusion that is happening in China."

The result increasingly looks like a battle royale for control of emerging technologies in which China aspires to become a global leader, especially in telecommunications and artificial intelligence.

Share prices of the Chinese companies on the possible hit list are plunging, and Chinese officials are not happy about it.

"The U.S. government is repeatedly using national security as grounds to justify supply chain restrictions, an unreasonable move for Western countries that are supposed to be the stoutest believers in free trade and the market economy," said Liu Guohong, research director at think tank China Development Institute in Shenzhen. "The U.S. intention can't be any clearer, and that is to contain China's rise in advanced technology."

Turning on Other China Tech Makers

Two of the companies newly on U.S. radar - Hikvision (002415 SZ) and Zhejiang Dahhua Technology (002236 SZ), are leaders in facial-recognition technology. Both have an international presence and are based in the east coast city of Hangzhou.

Hikvision is one of the biggest surveillance firms in the world, with more than $42 billion in revenues in 2017. Dahhua transacts more than $2 billion in annual sales and has 11,000 employees. The stocks of both companies took big hits in the last couple of days, with Hikvision plunging 9.6 percent Thursday before recovering slightly.

A common thread is that these firms' cameras combined with facial-recognition abilities allow them to be used by the government to monitor its own citizens on a vaster scale than anything previously. The country's leaders consider any such considerations to be blatant interference in China's internal affairs.

The U.S. is concerned not only about authoritarian uses in China but also that these products may be equipped with spyware that could allow them to conduct espionage in the U.S. if they are allowed here. Those are the same fears expressed about Huawei, which denies any such abilities or intentions.

Hikvision operates in more than 150 countries, and the U.S. government banned federal agencies from buying equipment from both Hikvision and Dahua last year.

Another entry on the possible blacklist is iFlytek (002230, SZ), a Shenzhen-based company that develops sophisticated speech and language software, including voice recognition. The firm is considered one of China's artificial intelligence leaders. News of its possible inclusion sent its shares down over 7 percent Thursday.

Yet another firm said to be on the target list is Xiamen Meiya (9300188, SZ), a data company that fell by the full 10% daily limit in Shenzhen on Thursday.

A Deal for Huawei?

Despite the U.S. actions contemplated and already taken against Chinese companies, both sides maintain that a trade deal remains possible.

Trump said Thursday there is "probably a good possibility" the two sides will be able to strike an agreement. "If we made a deal, I could imagine Huawei possibly being included in some form of or some part of a trade deal," the president said.

Hours earlier, Chinese Foreign Ministry spokesman Lu Kang called Washington's recent treatment of Chinese companies "political" and said that "relevant behavior by the U.S. was clearly not helping to create a conducive environment for negotiations" on trade.

Nonetheless, he said at a news conference, Beijing's door remained "wide open" when it came to further talks.

While officials on both sides clearly are unwilling to slam the door shut, at least officially, chances of a trade pact look bleak. President Trump and Chinese President Xi Jinping plan to meet at the G20 Summit in Japan at the end of June, but it would not be surprising to see Trump bail out on the trip, given his disdain for international gatherings.

At the end of the day, what all this means is that the trade war, which until now has focused mainly on economic matters, is morphing into a political and national security battle centering on technology. Fights over tariffs and unfair trade practices may share the stage with basic conflicts over the two nations' government systems and values.

Like the trade war itself, that's a battle unlikely to end well for either side as the U.S. and China appear to be sliding closer to a cold war.