Explainer-The U.S. export rule that hammered Huawei teed up to hit Russia

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While it is unclear how the rule could impact Russia, the restrictions hobbled Huawei’s smartphone business. Last month, the company said it expected 2021 revenue to have declined nearly 30% and predicted continued challenges this year.

WHAT IS THE RESTRICTION?

The Foreign Direct Product Rule, as it is called, may be adapted to halt Russia’s ability to import smartphones, key aircraft and automobile components, Reuters reported last month.

The administration is considering restricting chips and products with integrated circuits bound for Russia, a senior official said, imposing its authority over items made abroad if they are designed with U.S. software or technology, or produced using U.S. equipment.

WHAT EXPORTS TO RUSSIA COULD BE IMPACTED?

The restrictions could apply to critical industrial sectors like artificial intelligence, maritime, defense, and civil aviation, the official said, and could also be imposed more broadly, to include consumer electronics.

The scope of the rule against Russia has not been set but White House National Security Council officials have warned executives from the Semiconductor Industry Association, a chip lobbying group, of possible unprecedented actions, as Reuters reported last week.

It is unclear whether the rule could have the kind of devastating effect on Russia that it has had on Huawei.

“A strict imposition of the Foreign Direct Product rule would significantly affect trade and output in Russia, though it’s hard to say by how much,” said Jeffrey Schott, an expert on international trade policy and economic sanctions at the Peterson Institute for International Economics.

HOW DID IT IMPACT HUAWEI?

The Foreign Direct Product Rule now restricts both U.S. and non-U.S. companies from shipping items to Huawei that are the direct product of U.S. technology or software. Such shipments can only be made with a U.S. license.

The rule was added to the curbs on Huawei after the telecommunications equipment maker was placed on an export control blacklist known as the “entity list” in 2019 and it did not stop the global flow of chips to the company.

The initial listing affected U.S.-made goods and some limited items made abroad with U.S. technology but did not block overseas shipments to Huawei from companies such as Taiwan’s TSMC, the world’s largest contract chipmaker.

So in 2020, the United States added the Foreign Direct Product Rule to expand its authority to stop shipments of foreign-produced items to Huawei. Companies like TSMC that use U.S. chipmaking equipment are required to obtain U.S. licenses before supplying Huawei and licenses for sophisticated chips are denied.