How sanctions on Huawei can hit US-China trade talks progress

The Trump administration's decision to sanction and potentially cripple Chinese telecoms giant Huawei Technologies Co Ltd garnered a sharp rebuke on Thursday from Beijing, which warned that the move could damage trade talks.

Shares of Huawei's U.S. suppliers also fell on fears the huge customer of U.S. chips, software and other components would be forced to stop purchases after the U.S. Commerce Department banned it from buying U.S. technology without special approval. Huawei said in a statement that losing access to U.S. suppliers "will do significant economic harm to the American companies" and affect "tens of thousands of American jobs."

"Huawei will seek remedies immediately and find a resolution to this matter," the company said. The U.S. crackdown, announced on Wednesday, was the latest shot fired in an escalating U.S.-China trade war that is rattling financial markets and threatening to derail a slowing global economy.

Chinese officials said U.S. aggressiveness could hurt the trade talks, which appeared to have hit an impasse in the past week as the United States hiked tariffs on Chinese goods and Beijing retaliated with higher duties on U.S. products. Chinese Commerce Ministry spokesman Gao Feng stressed that the United States should avoid further damaging Sino-U.S. trade relations. "China will take all the necessary measures to resolutely safeguard the legitimate rights of Chinese firms," Gao told reporters.

China's Foreign Ministry also announced the formal arrest of two Canadian citizens who were detained shortly after Canada arrested Huawei Chief Financial Officer Meng Wanzhou in December. Meng faces extradition to the United States on charges that she conspired to defraud global banks about Huawei's relationship with a company operating in Iran. She and the company deny the charges.

While Canada says China has made no specific link between the detentions of the two men and Meng's arrest, experts and former diplomats say they have no doubt it is using their cases to pressure Canada. POLITICAL SUPPORT

On Wednesday, the Commerce Department said it was adding Huawei and 70 affiliates to its "Entity List," which bars them from buying components and technology from U.S. firms without government approval. The sanctions have not yet gone into effect. Lawmakers in the U.S. Congress have long feared Huawei's equipment could be used by the Chinese government to spy on Americans, and the Trump administration's move has won bipartisan support in Congress.

Senator Roger Wicker, the Republican chairman of the Senate Committee on Commerce, Science, and Transportation, said on Wednesday it was "a necessary step to prevent the use of communications equipment that poses a threat to the United States." Senator Mark Warner, a Democrat and vice chairman of the Senate Select Committee on Intelligence, backed the executive order banning U.S. telecommunications firms from buying from Huawei, as did other Democrats.

Warner called the decision "a needed step" but expressed concern about the prospect of other nations rebuffing U.S. efforts to convince them to not use Huawei equipment for 5G, the next generation of wireless. Warner also expressed concern about how the move would affect small U.S. rural carriers, who have relied on the cheaper Chinese equipment maker. He called a plan to replace the equipment "a potentially multi-billion dollar effort."

ECONOMIC FALLOUT Chipmakers Qualcomm Inc and Xilinx Inc were down between 3% to just over 4% on Thursday and were the biggest drags on the Philadelphia SE Semiconductor Index.

Shares of optical components maker NeoPhotonics Corp fell the most and were down 14.7%. Other suppliers like Analog Devices and Finisar Corp were both down about 2% while Skyworks Solutions was down 4.4%, Qorvo 5%, laser sensor maker Lumentum Holdings was down 7.7%, and memory chipmaker Micron Technology 2.1%.

As signs emerge that consumers could feel the weight of the trade war with China, Walmart said U.S. prices will rise due to higher tariffs on Chinese goods even as the world's largest retailer reported its best comparable sales growth for the first quarter in nine years. Walmart Chief Financial Officer Brett Biggs told Reuters the company will seek to ease the pain, in part by trying to buy from different countries.

As negotiations towards resolving the U.S.-China trade war stalled last week, the United States ramped up the pressure by raising tariffs on a list of $200 billion worth of Chinese imports to 25% from 10%. China retaliated with higher tariffs on a revised list of $60 billion worth of U.S. products.

U.S. President Donald Trump has threatened to put 25% tariffs on another $300 billion worth of Chinese goods. "The tariff hike by the United States will only bring greater difficulties to the consultations," Gao said.

Three differences remain between the two countries, according to China. China believes tariffs were the genesis of the trade dispute, and that all tariffs must be eliminated in order to reach a deal.

The second issue centres on the additional volume of U.S. goods that China will agree to buy, Vice Premier Liu He, China's lead trade negotiator, said last week without giving details. The third is over how balanced the text of the draft agreement of the trade deal should be, he said. 

(With inputs from agencies.)