Sanctioning a Global Player: Direct and Spillover Effects of U.S. Restrictions on Huawei in the U.S. and European Markets, joint with Shiyuan Li and Frank Verboven

Work-in-progress. Working paper coming soon.

The recent trade war between the U.S. and China has led to sanctions on large Chinese firms, with consequences that extend beyond the focal markets and potentially generate significant side effects on third countries. In this paper, we analyze how some of these sanctions, targeted at a specific firm (Huawei) and restricting its access to key U.S. technologies, affect consumer and total welfare in the U.S. and European smartphone markets. Using detailed model-level data from 2010 to 2020, we first show that the sanctions negatively impacted both prices and sales of Huawei. Subsequently, we develop and estimate a differentiated products oligopoly model where consumers’ demand depends on some of the components affected by the sanctions (i.e., Google Mobile Services – which are usually bundled with Android OS, and the mobile chipset’s generation) among the relevant product attributes. We conduct a series of policy counterfactuals to simulate markets’ outcomes with these key components not being available to Huawei anymore. Our results suggest that the U.S.-based sanctions are “effective” in all countries studied and significantly reduce Huawei’s market performance. Apple, the U.S.-based competitor, benefits from the sanctions. While the U.S. smartphone market remains unaffected, the most severe adverse effects are observed in low-income European countries. We also simulate a complete ban on the firm’s products in the U.S. and Europe. The results from these counterfactual analyses highlight substantial losses in both consumer welfare and industry profits.