WASHINGTON (BLOOMBERG) – A US ban of China Telecom (Americas) by regulators signals an escalation of tension as the world’s two largest economies clash over issues ranging from the coronavirus to cyber-espionage and computer chips.

The US Federal Communications Commission (FCC) on Tuesday (Oct 26) voted 4-0 to cancel permission to operate in the US for the unit of China Telecom, one of three leading communications providers in China.

Though the company doesn’t do a lot of business in the US, being barred from the market is significant coming on the heels of the moves against other giants of China’s burgeoning technology industry, including its crown jewel, Huawei Technologies.

“It’s an important action,” said Mr Martijn Rasser, director of the technology and national security program at the Centre for a New American Security in Washington. “It also sends a broader message to Beijing, that regardless of who’s president, the US continues to be concerned about the risks posed by Chinese tech firms operating in the US.”

President Joe Biden and President Xi Jinping are expected to meet virtually later this year. The two men last spoke on Sept 9 and discussed what the White House described as guardrails to ensure that competition between the two countries doesn’t veer into conflict.

Their encounters follow friction during former President Donald Trump’s administration, which pursued an aggressive approach to China, especially on trade.

The two nations are currently sparring over a wide range of issues, from Beijing’s moves toward Taiwan and Hong Kong to the origins of the coronavirus pandemic. The Trump administration used export controls, prohibitions and executive orders to block companies including China’s biggest technology company, Huawei, and chipmaker Semiconductor Manufacturing International Corp.

The FCC has also stepped in with actions against Huawei, China Mobile. and others.

On Tuesday it said that China Telecom (Americas) “raised significant national security and law enforcement risks”.

“Our record makes clear it operates as a subsidiary of a Chinese state-owned enterprise” giving the Chinese government’s ability to control its actions, said acting FCC Chairman Jessica Rosenworcel. “That can lead to real problems with our telecommunications networks,” including surveillance and misrouted traffic.

Beijing-based China Telecom is one of the largest phone companies in China and the second-largest wireless carrier in China with 370 million subscribers, according to an Oct 22 securities filing by the company.

Along with China Mobile and China Unicom, it dominates the Chinese telecommunications market, according to a US Senate report last year.

“The FCC action is long overdue,” said Mr Derek Scissors, senior fellow at the American Enterprise Institute.

“The Chinese telecom majors are arms of the government much more than they are commercial enterprises.”

China Telecom earlier told the agency it’s an independent business based in the US and isn’t subject to Chinese government control. “The FCC’s decision is disappointing,” China Telecom spokesman Ge Yu said in an email.

“We plan to pursue all available options while continuing to serve our customers.”

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There was no response to an email sent to the press contact at the Chinese embassy in Washington.

The FCC’s action shows that more moves against Chinese tech may be brewing, said Ms Roslyn Layton, co-founder of the China Tech Threat website that tracks Chinese technology and suggests policies to bolster security.

“This move demonstrates that the FCC is not afraid to take action against the world’s big players,” Ms Layton said in an email.

The FCC is moving toward ending authorisations for China Unicom Americas, Pacific Networks and its subsidiary ComNet.

In June the agency proposed a ban on products from five Chinese companies including Huawei and surveillance camera-makers Hangzhou Hikvision Digital Technology and Dahua Technology .

FCC Commissioner Brendan Carr has called for steps to bar Shenzhen, China-based drone maker SZ DJI Technology from the US market, calling it “a Huawei on wings”.

China Telecom needs to cease operations in the US within 60 days of the FCC’s order being published, the agency said in a news release. The company’s US business is dwarfed by its activities elsewhere.

The US business’s contribution to the overall revenue and assets is small, China Telecom’s Chief Executive Officer Ke Ruiwen said during an earnings call in August 2020, without giving details. Its US unit leases lines from American infrastructure providers and carriers to provide enterprise and wireless services.

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China Telecom’s Internet backbone reaches into the US, said Mr John Byrne, an analyst with GlobalData.

“Essentially what they do is provide a very reliable domestic Chinese network for multinational companies in a variety of markets that are looking to access supply chain partners or customers. Conversely, they provide reliable US connectivity for Chinese entities,” Mr Byrne said.

“In the current environment, many Chinese operators and telecoms equipment vendors are being painted with the same brush – no real evidence of any misdoings but a general perception that they could commit some sort of malfeasance at the behest of Chinese government actors – corporate espionage or the like,” Mr Byrne said.

“And frankly there is no constituency at this moment for a US politician or regulator appearing to take the side of the Chinese government.”

US officials have said they get information about potential threats in confidential briefings.

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