Gadgetory

One of the largest tech companies in the world is getting blacklisted by the United States. On May 16th, Huawei was added to the Commerce Department's Entity List, which restricts it from doing business with any US company without explicit government approval. There's a small carve-out for maintaining phones that have already shipped, but basically, it means a de facto ban on US companies selling to Huawei. Google has already revoked the company's Android license, and Intel and Qualcomm are considering similar moves. It's part of a much bigger fight between the US and China, and it goes a lot deeper than what you've probably read. Your cellphone, your laptop, your air conditioner, your light bulbs, all of it was probably made in China. And if you're in the US, it came by the same trade route that's now breaking down. But to realize why all that's happening, you have to look at the big picture. (bright music) If you wanted to put a date on the beginning of the modern electronics industry, 1980 would be a pretty good choice. It was the year of Apple's IPO, the year that the personal computer evolved from a nice hobby into a mass-market consumer product. But, more importantly, it was the year China created the Shenzhen Special Economic Zone, a space where Chinese companies could trade in a free market backed up by the power of communist central planning. If the government wanted experts to be cheaper, it could forcibly lower the exchange rate. If a bunch of houses were getting in the way of factory construction, they could just tear the houses down. Over the next 40 years, that system built Shenzhen into the greatest manufacturing hub the world's ever seen at the same time that the tech industry was coming into its own. Those 40 years gave us the personal computer, the smartphone, and the quadcopter drone, with each generation of tech relying a little bit more on the Trans-Pacific trade. It's not that we wouldn't have smartphones without China's factory push, but they might look completely different and cost a lot more. Now, that system's starting to break down, and it's not just because of Huawei. We're in the middle of a really ugly trade war. In May, Trump announced a plan to raise import taxes as high as 25 percent on laptops and smartphones from China. Each new tariff from the US is met with more tariffs from China, which then triggers more retaliation from the US. So far, the most damaging move from China has been a new tax on soybean imports, which has left the prices plummeting and costs US farmers billions of dollars. We're seeing executives arrested and jailed on both sides, risking an unprecedented collapse in trade. At first, Huawei's problems were more about security than economics. Given how much Chinese spying happens in the US, a lot of people in the intelligence community are nervous about a Chinese company operating American cell towers. But this latest move goes further, putting Huawei's entire cellphone business in jeopardy. Even the CEO admits it's really hard to build a phone without US microchips. The big picture problem is that building US goods in China just doesn't seem like that great of a deal anymore. In the '80s and '90s, leaders in both countries saw outsourcing as a win-win. American consumers got cheaper goods, and Chinese workers got lifted out of poverty and exposed to democratic ideas at the same time. In the US, it was great for microchip designers and tech shareholders but bad for factory jobs, and it contributed a lot to the cratering of the middle class. On the Chinese side, those same factory jobs have made the country a lot richer. More imports are coming in, so China has unwound a lot of the currency manipulation that made exports so cheap to begin with. As a result, manufacturers have started looking to India and Vietnam for cheap factory labor. And Chinese tech companies want to design phones instead of just assembling them. And they're less reliant on the US market than ever. So what does all that mean for Huawei? If the commerce order holds up and the US doesn't grant any licenses, it means the company may have to make a phone without any US components. That means no Gorilla Glass and no Micron flash memory, among other parts. But all those parts have foreign competitors, even if they're more expensive and not quite as good. Huawei doesn't want to build a phone without US parts, but they probably can if they have to. You can't say the same thing for US companies. If Apple had to build an iPhone without China or even just stop selling iPhones in the Chinese market, it would be a disaster for the company. Moving factories takes years, and it would plunge the entire industry into chaos. There's still time to avoid that, but there's no sign of either side backing down. And if we keep going, the US may have a lot more to lose than China. Thanks for watching. If you want to know more about how this is affecting gadget makers in the US, Ashley Carman has a great video about sort of what all the tariff stuff means. And as always, like and subscribe.