Supply Chain Issues: Huawei and ZTE

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Huawei and ZTE, two large Chinese telecommunications companies, have received considerable scrutiny from the Trump administration based on concerns that these companies have cozy relations with the Chinese government that threatens the integrity of data networks.  Today, Huawei is banned from doing business in the U.S., and ZTE is banned from business with the U.S. government.  What does this mean for supply chains that contain or rely on equipment made by these companies?  How are policy makers thinking about these questions?  Are we headed towards a world of technology with two camps - the West vs. China?  Please join us for this timely discussion as our experts consider these questions in this teleforum.  

Featuring: 

Rafi Martina*, Senior Policy Advisor and Senior Technology Counsel, Senator Mark Warner

Dan Ball, Deputy Policy Director, U.S. Senate Committee on Commerce, Science, & Transportation

 

* Unfortunately, Rafi Martina was unable to join this call. 

 

Teleforum calls are open to all dues paying members of the Federalist Society. To become a member, sign up on our website. As a member, you should receive email announcements of upcoming Teleforum calls which contain the conference call phone number. If you are not receiving those email announcements, please contact us at 202-822-8138.

Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's International & National Security Law Practice Group and Telecommunications & Electronic Media Practice Group Practice Group, was recorded on Wednesday, October 23, 2019, during a live teleforum conference call held exclusively for Federalist Society members.          

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon’s topic is on “Supply Chain Issues: Huawei and ZTE.” My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today we are very fortunate to have with us Mr. Dan Ball, who is Deputy Policy Director for the U.S. Senate Committee on Commerce, Science, & Transportation and is the Team Lead for Tech, Telecommunications, Innovations and the Internet. Unfortunately, Rafi Martina was not able to join us today, but Dan will certainly do more than enough to teach us, educate us, keep us up to date on 5G infrastructure. After our speaker gives his opening remarks, we will have time for Q&A, so please keep in mind what questions you have for this subject or for Dan himself. Thank you very much for sharing with us today. Dan, the floor is yours.

 

Dan Ball:  Great. Well, thank you very much, Wesley. I appreciate the opportunity to speak on this subject. A little bit of background: we’re talking about 5G, Fifth Generation Telecommunications Services. And understanding the nature of those is important to understanding why addressing security risks is so important. Compared to Fourth Generation, 4G, technology, 5G is going to be perhaps as much as 100 times faster in terms of data transmission. So truly a potential replacement for wireline, fiber optic, and coaxial transmission. And it’s also going to allow the connection of perhaps as many as 1,000 times more devices to the internet. That is going to make possible what is often referred to as the Fourth Industrial Revolution as everything becomes connected, connected to the internet, automated, and able to communicate in almost instantaneous fashion. This will be a very low latency technology.

 

      So it will be used to control, among other things, automated cars and city operations, telemedicine, industrial operations, robotics, all of these things are going to be connected to the internet and entrusted with a much greater role in facilitating commerce and transportation than anything we have seen so far.

 

      There will be implications that we can’t even imagine, as we couldn’t -- ten years ago people would not have predicted Uber and Airbnb and some of these things.

 

      So it is with that in mind that Chairman Wicker has introduced the U.S. 5G Leadership Act, which is designed to exert U.S. leadership in 5G, protect our national security by removing Huawei, ZTE, and other equipment that poses a national security risk, and come up with a means to secure the network generally. There are a number of other agencies and entities that have taken measures to address the Huawei/ZTE issue. I will refer to it as Huawei and ZTE; those are the only two entities that have so far been consistently identified as posing a national security risk. But the framework that the Chairman has proposed would be broad enough to encompass future risks, and I’ll get into some of that detail.

 

      Last year in the National Defense Authorization Act of 2018, the bill specified that an executive agency could not obtain, or contract to obtain, any equipment, system, or service for telecommunications or enter into a contract for any of those things with an entity that would use a critical component or a substantial component that posed a national security risk. And this was specifically intended to address Huawei and ZTE. There’s been some question about its interpretation so a further revision of that is expected and is not expected to be controversial.

 

      In May of this year, the Trump administration released an executive order on May 15th. It established the Secretary of Commerce as the responsible party overseeing other agencies in determining how to prohibit the acquisition, importation, transfer, installation, or dealing in information communications technologies that were found to present an undue risk. We expect to have rules from the administration fairly soon in that regard. Almost any day now we’re expecting rules there.

 

      Separately, the Federal Communications Commission has initiated a proceeding on supply chain matters on its own. Its authority is more limited so it has focused on the use of federal funds primarily through the Universal Service Fund, which is used to promote employment in rural areas to schools and libraries, things of that nature. What limitations, if any, should be placed on those U.S.F funds for purchase of equipment that poses an undue risk? That proceeding is still open.

 

      So against that backdrop, the Chairman has been advocating for the United States 5G Leadership Act. And that is to provide a comprehensive approach to the issue of communications equipment that poses an undue security risk. It would establish federal policy regarding the timely deployment of secure 5G services. It would prohibit equipment that posed a national security risk. It would fund what is often called the “rip and replacement” of Huawei and ZTE equipment in our nation’s communications networks. It would provide a process to allow companies to share with each other and with the federal government information about security risks and vulnerabilities that they have experienced.

 

      There has been significant concern on the part of industry in sharing this information because of possible liability. So the U.S. 5G Leadership Act would provide a narrowly tailored safe harbor. The bill would encourage the expert agencies to assess and make available information on security risks from Huawei, ZTE, and other equipment. And it would encourage U.S. leadership in standard-setting bodies, which is a key part of how we will protect our networks in the United States and around the world going forward. China has made a concerted effort to advance its interests by packing some of these bodies. The Western companies have made a good effort to counter that, but we think that there’s more that needs to be done.

 

      So that is the U.S. 5G Leadership Act in a nutshell. We have been in discussions with other countries about their efforts to address the Huawei and ZTE issue. Japan and New Zealand have banned Huawei from their networks. And the risk is not just the ability to spy. And I bring this up now because the two countries have different reasons for their actions. Japan was particularly concerned about the ability of Huawei equipment to just shut down the communications network, which would be debilitating now but even more so if communications networks were the basis for transportation, medical services, power transmission, etc., etc.

 

      And then there’s also the issue of being able to spy, collect intelligence. It is required of Chinese by Chinese law that a company assist Chinese intelligence services if it is asked to do so. So no matter what Huawei says about its intentions if it is called upon to spy, it will be required to do so. And just about a month ago they were have found to have done so on some networks installed in China.

 

      The Chinese approach to Huawei and ZTE has been to subsidize the availability of Huawei and ZTE equipment for networks and to make available the equipment on extremely favorable financing terms. So they’ve made huge inroads in Africa and in poorer countries, but also in countries like Germany. So that is an ongoing risk to the extent that we have communications with these countries that can’t be fully protected. And that has been the subject of a significant amount of discussion with Germany.

 

      In the United Kingdom, they have taken a somewhat different approach, which is to recognize that there is greater risk inherent in using Huawei and ZTE equipment and to try to require any service provider to bring that level down through extra security means to a standard level that would be associated with any equipment. So rather than outright ban, they are trying to mitigate the risk. I’m not sure that that is where they will end up. Ultimately, I think they might decide they have to be more aggressive. But they are, at least for now, talking about a middle way in dealing with Huawei. I think that’s about it. If there are any particular questions, I would be happy to address them.

 

Wesley Hodges:  Absolutely. Dan, thank you so much for that overview.

 

Dan Ball:  So just a little bit more context on the situation we face here in the United States. Our big communications providers do not use Huawei and ZTE. It is overwhelmingly an issue with the small and usually rural providers. They're operating on much tighter margins. And so the lower cost of Huawei and ZTE equipment was more attractive to them. So it’s not a problem we have in our major communications networks. We have provided in the U.S. 5G Leadership Act a fund of about $7 million for “rip and replace.” We believe that is sufficient. The House has similar legislation and they have proposed a $1 billion fund for “rip and replace.” So we’re within the same ballpark. They have a slightly different means of financing it.

     

      In both instances, we would defer to the expert agencies to determine the risk posed by equipment. In that regard, we’re talking about agencies like the Department of Defense, Department of Homeland Security and the intelligence agencies. And then for removal of the equipment and replacement, we would give significant flexibility to the FCC to determine the appropriate and cost-effective way of ripping and replacing this equipment. It’s a tricky issue because we don’t want to lock folks in to a previous version of technology if the taxpayer can get the same value -- or can get greater value from the same investment in more modern technology. So that’s going to be a very tricky issue to make sure that the taxpayer resources are carefully guarded.

 

Wesley Hodges:  Very good. Dan, while we wait for any questions we may have, I do have a question for you, and I apologize if you’ve already addressed parts of it already. This fund that’s been set aside for the “rip and replace,” how come compulsory is this? Is this the government trying to incentivize people on their own choice to do this? Is it something that is a mandate? Could you go into more detail there?

 

Dan Ball:  Yes. So it would be required that any entity that gets federal support would not -- it would be prohibited from using Huawei or ZTE or other undue risk equipment in the network. And that is -- that, in effect, makes it mandatory. And it would also apply to government investment information technology and communications technology generally.

 

Wesley Hodges:  Maybe a follow-up question. Obviously, this is 5G. It’s the future. It’s what we’re all going to be building and experiencing shortly. But perhaps we could turn back to the history. Maybe look at 4G. Do we ever see threats? Maybe not to this scale, but similar sets of arguments and threats and occasions back in that generation?

 

Dan Ball:  We really did not. It’s been a few years since we’ve known about the risk of Huawei and ZTE, official action taken last year in the National Defense Authorization Act that I mentioned. So folks have known for a few years. We, in the U.S. 5G Leadership Act, put in a cutoff for eligibility for replacement of the enactment of the NDAA last year. So that companies by then were fully on notice of the risk and the taxpayer would not be responsible for anything purchased after that date.

 

      But there has not been the same focus on the security risks. Huawei and ZTE did not have the leadership role in 4G technology that American companies have. And I should say Western companies. We’re really talking about Nokia, and Ericsson, and to a lesser extent, Samsung, as the companies that can compete broadly with Huawei and ZTE. That’s it. We’ve got some critical component manufacturers and chip manufacturers in the United States, but we don’t have a domestic supplier that is able to do the broad range of network services that those three companies can in competition with Huawei and ZTE.

 

      So because Western companies had the leadership position on 4G technology and Huawei and ZTE were just getting started, this was not the same concern. Again, as I mentioned, it’s also the factor of what 5G communications technology will be doing that makes it so much more of a threat.

 

Wesley Hodges:  Absolutely. And I guess from your comments, would you say, looking at your crystal ball on Capitol Hill, you don’t see that company dynamic changing too much in the near future? As in you don’t see certainly an American supplier coming out of the mist to provide that infrastructure?

 

Dan Ball:  So 5G technology is going to different in that it’s going to be much more software based rather than equipment based. So there is some potential, but for now, no. We are looking at some domestic production by Western providers but that’s it. There’s nobody in the wings, at least that I’m aware of, that’s going to be able to supplant or even really augment the other Western providers at this time.

 

Wesley Hodges:  Maybe a follow-up question, Dan, would be we’ve talked about 5G for years now and its implementation. Are there any sort of date, deadlines, or expectation for when we start seeing more of the implementation of 5G? Is this something that could go on just like we’ve talked about the next mission to the moon where it’s going to happen, but just not this year; just not quite yet?

 

Dan Ball:  So it is happening now. There are 5G deployments. Not all of the standards have been finalized yet for 5G. So it’s being implemented in phases in some ways. But 5G, if I can get a little technical here, is going to rely on higher band spectrum with more dense network deployment that will allow -- greatly reduce latency so that you can have cars stopping in 10 feet instead of 30 feet from the transmission of an emergency signal. That means that there is a massive infrastructure program underway by all of the major carriers. And because of the economics and the nature of the frequencies being used to deploy 5G, it is going to be in the cities first and then working its way out from there. We hope that it will reach rural America. I think there are different ways that it will be able to do that eventually. But it’s going to be deployed in urban areas.

 

      And it is, in some instances, the FCC had an auction of high-band spectrum of the 24 gigahertz band that is very well suited for 5G operations. And at least one of the major carriers already has that in operation and is getting gigabit wireless connections. So at that rate, it really is a full substitute for traditional wireline connections.

 

Wesley Hodges:  Well, very good. Another question for you would be what sort of obstacles do you see getting the frequency spectrum available for -- available enough for 5G? Do we see a lot of obstacles in the federal government and in the private economy to getting enough frequently available for these technologies?

 

Dan Ball:  Yes. There will always be demand for more spectrum for 5G. 5G will require a mix of low-band spectrum which provides a lot of coverage but not a lot of density in that you can’t reuse the frequently that much. Mid-band, which is because of its combination of coverage and capacity, ideally suited for the initial deployment of 5G and generating a customer base. And then a high-band, which will allow -- which will require antennas every hundred yards or so, perhaps less, offering tremendous capacity, but very small coverage radius.

 

      The FCC has made great strides in providing high-band spectrum. Mid-band spectrum is proving to be a challenge. The FCC will have its first auction of mid-band spectrum in the middle of next year. And that’s only going to be 70 megahertz, and it’s going to be on a shared basis. So that’s a little novel.

 

      The big talk on mid-band spectrum is the C-band currently used for satellite transmission, primarily of broadcast television programming. In the 3.7-4.2 band there is discussion about moving some satellite operations to free up, perhaps, 300 megahertz of spectrum. And generally folks think that having 100 megahertz of spectrum for a carrier allows it go get the maximum benefit of 5G capabilities. So that would make possible three bands of 100 megahertz or some subset of that for rural applications where the full 100 might not be as valuable.

 

      So there’s progress being made, but there’s a lot of work to do. This is an area where China has a huge advantage because they were able to just grant their domestic providers big chunks of spectrum. And it takes years to clear spectrum in the United States. Beyond that, in legislation passed last year, the MOBILE NOW Act, the Federal Communications Commission and the National Telecommunications Information Administration were directed to look at additional spectrum in the mid-band between 3.1 and 4.2 up to, I think, 4.5. And there’re also efforts to identify lower-band spectrum closer to 1 gigahertz that could also be used for 5G.

 

      I should also point out that what Chairman Wicker has proposed with the 5G Leadership Act has a companion -- a similar bill in the House that seeks to address the same issues. And it appears to be an area where there’s broad bipartisan consensus that we need to do something. We need to get this equipment out and we need to do more to protect the security of our 5G networks.

 

Wesley Hodges:  Well, very good. Thank you, Dan. Speaking from the consumer’s perspective when 5G antennas are going to set up all across cities and become more a part of our regular lives, in what way will be consumer be knowledgably interacting with 5G? Obviously, Apple and tech companies are going to selling us devices that are 5G capable, etc. But is this the -- do you expect a similar type of economy to -- the way we pay for data with smart phones . . . not sure if your, again your crystal ball has any predications there.

 

Dan Ball:  Because of its tremendous capacity, I do think wireless internet connections will provide competition to traditional wireline sources. So that could be a significant pro-consumer benefit. Some real competition. There’s already significant competition in internet access service in most urban areas. And we are still, for the foreseeable future, talking about a largely urban product. But this will be a significant new entrant that could really change up the market and drive more competition.

 

      Beyond that, I think the interaction with 5G is going to exponentially greater than our current interaction with 4G. I think there will be a level of automation of smart systems, of things connected to the internet far beyond what we see today. And I think the most exciting part is the things that we don’t even envision now.

 

      I think we are moving in a direction where internet capacity constraints, at least in an urban environment, are no longer going to be a factor. That may be a little bit rosy, but I think things are heading in that direction.

 

Wesley Hodges:  So Dan, do you have any closing remarks for us before we sign off today?

 

Dan Ball:  No. Thank you very much for the opportunity to talk about this very important matter.

 

Wesley Hodges:  Absolutely. Well, Dan, it has been our privilege. And on behalf of The Federalist Society, I'd like to thank you for the benefit of your valuable time and expertise. We welcome all listener feedback by email at info@fedsoc.org. Thank you all for joining us for the call. We are now adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.