Weaponize the Supply Chain: US Sanctions on Huawei and Tech Decoupling

• In Event: Climate and Geopolitics in Global Value Chains

Abstract

Since 2018, the United States has imposed sanctions on the Chinese tech giant Huawei due to national security concerns. These measures have impacted not only just Huawei but also its suppliers and customers, including American firms. In contrast to previous literature uses aggregate outcome variables such as trade and investment at the country level, we want to study the impacts of sanctions on firms and their supply chains. In this project, we want to know: 1) how do sanctions affect the number and financial performance of Huawei's US suppliers and customers? 2) Do US companies find substitutes for Huawei with alternatives from other third parties?

Using Bloomberg supply chain data, we track Huawei's suppliers and customers from 2015 to 2023. We find that Huawei highly depends on US companies' supplies, whereas fewer US companies are its customers. For example, in March 2019, after banning the US government's purchase of Huawei, Huawei had 56 US suppliers and 18 US customers. And only 2 out of 18 US customers were doing business with Huawei in the targeted semiconductor and telecommunications sectors. Therefore, we hypothesize that sanctions will reduce the financial performance of Huawei’s US suppliers compared to their domestic market peers, while having little effect on Huawei’s US customers. Additionally, the magnitude of impact on US suppliers will depend on their ability to secure alternative markets.

For the modeling process, we adopt the Difference-in-Difference method and two-way fixed effect models. The unit of analysis is firm-year. The dependent variables are firms’ operating revenues and a dummy variable indicating if they are doing business with Huawei in a given year. The key independent variable is identified using a DiD approach, which includes a unit dummy to identify US companies and a year dummy to mark the post-sanction periods. We also include control variables: one-year lag of operating revenues, R&D expenses/operating revenues, total assets, and current ratio. Data on firms’ financial indicators are from the Orbis dataset. Preliminary results show that after sanctions in 2019, compared with domestic competitors, US companies that supplied to Huawei saw a 0.86% drop in operating revenues. On the side of Huawei's US customers, sanctions did not significantly impact their revenues due to its limited dependence on Huawei's supplies.

This research constitutes the first quantitative analysis of the effectiveness of US sanctions against Chinese high-tech companies. Furthermore, this research analyzes the impact of sanctions on firms and their global value chains.

Authors

• Quan Li, Texas A&M University

• Kexin Bai, Texas A&M University