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U.S. Commerce Department in May placed Huawei on a trade blacklist, citing national security concerns.

TOLGA AKMEN/AFP/Getty Images

The U.S. Commerce Department has withdrawn a rule aimed at further reducing sales to China’s Huawei Technologies amid concerns from the Defense Department that the move would harm U.S. businesses, people familiar with the matter said.

The decision to pull the rule from the formal review process leaves its future in jeopardy and highlights deep divides within the Trump administration over how best to approach the blacklisted telecoms giant and the broader war with China over technological dominance.

But President Donald Trump’s administration plans a Cabinet-level meeting next week to discuss the rule, which could be revived, killed or rewritten, one of the sources said, amid pushback from the U.S. Treasury Department as well.

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A Commerce Department representative said “if and when” the agency has something to announce, “we will do so.” Huawei declined to comment. The Pentagon and Treasury did not immediately respond to requests for comment.

Commerce in May placed Huawei on a trade blacklist, citing national security concerns. That allowed the U.S. government to restrict sales of American-made goods to the company and a small number of items made abroad that contain U.S. technology.

Under current regulations, key foreign supply chains remain beyond the reach of U.S. authorities, fuelling frustration among China hawks within the administration and a push to expand U.S. authority to block more shipments to Huawei.

Reuters reported in November that the Commerce Department was considering broadening the rule that dictates how much American content in a foreign-made product gives the U.S. government authority to regulate exports.

Under current regulations, the United States can require a license or block the export of many high-tech products shipped to China from other countries if U.S.-made components make up more than 25% of the value.

Commerce drafted a rule that would lower the threshold only on exports to Huawei to 10% and expand the purview to include non-technical goods like consumer electronics including nonsensitive chips.

The draft rule was then sent to the Office of Management and Budget, where agencies, including the Department of Defense, were given until Wednesday to submit comments, one of the people said. When the Pentagon expressed disagreement with the proposal, Commerce pulled it out of the review process, an unusual move, pending a Cabinet-level meeting next week.

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U.S. businesses have pushed back against the measure, arguing that enabling the government to regulate more sales to Huawei to include low-tech items made overseas with very little U.S. technology would end up needlessly hurting American companies while encouraging Huawei to source more goods abroad.

But many China hawks in Congress and the Trump administration have criticized the Commerce department for not doing more to thwart Huawei and for its slow rollout of rules to limit exports of sophisticated technology to China.

Republican Senator Tom Cotton said in a statement that he was “deeply troubled” by reports that the Pentagon had pushed back against the proposed rule change, saying he planned to get to the bottom of the “ill-considered decision.”

“It’s bad enough when capitalists are willing to sell the rope that will be used to hang us, but worse still when our military acts as their lobbyist,” Cotton said.

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