The Federal Communications Commission has classified Huawei and ZTE as national security threats, in a move that will bar US companies from using government money to buy products from the Chinese telecoms groups.
Ajit Pai, FCC chairman, said the move would prevent Huawei and ZTE from receiving any of the $8.3bn that the government provides to US companies to ensure that underserved areas of the country have telecoms services.
“Both companies have close ties to the Chinese Communist party and China’s military apparatus and both companies are broadly subject to Chinese law obligating them to co-operate with the country’s intelligence services,” Mr Pai said.
The decision is the latest effort by the US to tackle security threats from China. The US this week barred American companies from selling weapons and sensitive technologies, including surveillance cameras, to Hong Kong in response to China imposing a national security law on the territory.
The White House criticised the Chinese move, which came into force on Tuesday, saying it showed that Hong Kong no longer enjoyed the level of autonomy that was guaranteed as part of the “one country, two systems” model that underpinned the return of the former British colony to China.
The move against Huawei and ZTE is part of a broader effort by the US to clamp down on everything from Chinese theft of intellectual property to other kinds of commercial and traditional espionage.
There is also a growing anti-China sentiment in Congress with Democrats and Republicans largely agreeing that the US should take a tougher stance. Experts expect that sentiment will only grow louder ahead of November’s presidential election.
The Pentagon last week gave Congress a list of Chinese companies that have alleged ties to the Chinese military, partly to pressure investors into not investing in groups that pose a potential risk to the US. The list included China Telecom and China Mobile, two large Chinese telecoms companies that are listed in New York.
While the administration has taken a harder line on China, Mr Trump has at times eased the pressure on Beijing to help trade talks. In his new memoir, John Bolton, the former national security adviser, said Mr Trump had ordered his team to ease penalties on ZTE that were imposed after the group breached US sanctions related to Iran and North Korea.
The FCC last year unanimously approved a ban on using the so-called universal service funds for companies that pose a national security risk. The decision on Tuesday formalised the designation of Huawei and ZTE. The US has also been engaged in a global campaign to convince countries not to use Huawei for ultrafast 5G networks.
The FCC move will have the greatest impact on rural broadband providers that have relied on Huawei and ZTE for cheaper equipment.
Huawei and ZTE deny helping Beijing conduct espionage and the US has never made public any evidence. But experts say that even if Huawei and ZTE do not help China to spy, they would be unable to refuse requests from the Chinese government to hand over sensitive data.
Follow Demetri Sevastopulo on Twitter: @dimi