The Federal Communications Commission is considering a new rule to further curb the U.S. business of Huawei Technologies Co., making it harder for small and rural carriers to purchase gear from Chinese telecom-equipment makers, according to people familiar with the matter.
Such a move would escalate the government’s campaign against the cellular-technology giant and its Chinese peers over what the Trump administration says are national-security concerns.
AT&T Inc. and other big carriers have long avoided Huawei, the world’s biggest wireless-equipment manufacturer by sales. A 2012 congressional report labeled the company a national-security threat, warning that Beijing could use its equipment for state-sponsored spying or cyberattacks.
A Huawei spokesman declined to comment on the FCC proposal. The company says it is employee-owned, has never been complicit in government-sponsored spying or sabotage, and is no greater threat than Western rivals because they all share a global supply chain.
The U.S. government doesn’t outright ban equipment by Huawei, which has targeted small and rural U.S. providers of wireless and broadband services. Many of these customers echo what big European carriers say about the Chinese manufacturer: Huawei’s equipment is often cheaper and better than that of its competitors. Some have said Huawei provides better customer service—worrying more about fixing the problem than getting paid.
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Huawei gear makes up less than 1% of the wireless equipment in U.S. networks, said analyst Stefan Pongratz of Dell’Oro Group. Sweden’s Ericsson AB and Finland’s Nokia Corp. each account for 48%, while South Korea’s Samsung Electronics Co. has 3% of the $30 billion-a-year U.S. market for cellular equipment, he said.
People familiar with the matter said the FCC proposal would limit subsidies for carriers that use Huawei gear—blocking them from drawing from the Universal Service Fund, an $8-billion-a-year government program supported by fees, amounting to a few dollars each, that are tacked onto individual phone bills. The fund subsidizes companies that offer broadband service in rural America and provides affordable wireless plans to low-income cellphone users, among other programs.
The FCC proposal is aimed at barring all Chinese telecom-equipment manufacturers, including Huawei and smaller rival ZTE Corp. , from benefiting from Universal Service Fund subsidies, people familiar with the matter said. ZTE representatives didn’t immediately return requests for comment Friday.
The FCC could unveil the proposal as early as Monday, the people said, though it could also decide to delay or shelve the plan.
In a letter to lawmakers this week, FCC Chairman Ajit Pai, a Republican, said, “I can report that I intend to take proactive steps to help ensure the integrity of the communications supply chain in the United States in the near future.” Mr. Pai was responding to lawmakers’ concerns that Huawei would seek a bigger foothold in the U.S. Lawmakers have long been concerned about Chinese espionage, and Huawei’s potential role in it.
The FCC idea marks the latest development in what the U.S. government has framed as a race with China to control an increasingly digital world. Washington is trying to prevent a future where most telecommunications electronics are made by Huawei and other Chinese-based manufacturers. Some officials fear Beijing could order such companies to exploit knowledge of how the equipment is designed to spy, disable communications or launch cyberattacks.
Washington has focused on Huawei as it has emerged as a top manufacturer of cellular-tower electronics, internet routers and other products that wireless and broadband providers need. Huawei is also the world’s No. 3 smartphone brand.
The FCC proposal took shape after lawmakers sent Mr. Pai a letter in December, asking that he and his fellow commissioners start receiving intelligence-agency briefings about the threat Huawei and other Chinese telecom-equipment companies pose, according to a person familiar with the matter.
The December letter also asked the FCC to scrutinize a pending deal by AT&T to sell Huawei smartphones. AT&T dropped that deal in January, without explaining why. Separately, Best Buy Co. recently decided to stop selling Huawei phones in the U.S.
In December, President Donald Trump signed a bill to ban Huawei and ZTE equipment from Defense Department nuclear-weapons systems. Earlier this month, Mr. Trump blocked Singapore-based Broadcom Ltd.’s $117 billion hostile bid for Qualcomm Inc., over worries that Broadcom could reduce the San Diego-based chip maker’s research-and-development budget. Security advisers worried that weakening Qualcomm, which competes against Huawei for wireless-technology patents, would further strengthen Huawei.
Meanwhile, a bipartisan group of House members have co-sponsored a bill that would bar the U.S. government—and its contractors—from using electronics from Huawei or ZTE.
—Drew FitzGerald and John McKinnon contributed to this article
Write to Stu Woo at Stu.Woo@wsj.com