"U.S. companies can sell their equipment to Huawei," Trump said at a news conference in Osaka, Japan, the site of the Group of 20 (G20) summit. "We're talking about equipment where there's no great national security problem with it."
Huawei is on a Commerce Department "entity list" that requires U.S. companies to get permission from Washington before selling components to the Chinese firm.
Trump also signed an executive order in May declaring a "national emergency" that empowers the White House to bar foreign tech companies deemed security threats from doing business in the U.S.
Though it was not explicitly named in the order, the Chinese tech giant was suspected to be a chief target over concerns that it shares its data with the Chinese government. Huawei, the second biggest smartphone brand in the world, has denied it cooperates with the Communist Party.
In retaliation to the administration's blacklist, China announced last month it would establish an "unreliable entity list" of foreign companies and individuals that "seriously damage" Chinese enterprises.
The efforts to curtail the company's ability to do business in the U.S. were implemented as part of a larger dispute with Beijing over trade imbalances and intellectual property theft. Trump said that he and Xi discussed Huawei as part of their talks on a range of subjects.
"I said that's OK, that we will keep selling that product, these are American companies that make these products. That's very complex, by the way," Trump said. "I've agreed to allow them to continue to sell that product so that American companies will continue."
The president added he believed he and Xi are "getting a little bit closer" to a broader trade deal.
Democrats and Republicans alike condemned the decision to allow U.S. companies to sell to Huawei, saying the ban was an effective tool to push China to adopt fairer trade policies and that the company poses a legitimate threat.
"Huawei is one of few potent levers we have to make China play fair on trade. If President Trump backs off, as it appears he is doing, it will dramatically undercut our ability to change China's unfair trades practices," Senate Minority Leader Charles Schumer (D-N.Y.) said in a statement.
"Huawei is not only an arm of the Chinese Communist Party, but also a close partner of the People's Liberation Army," Sen. Tom Cotton (R-Ark.), one of the Senate's most vocal foreign policy hawks, tweeted.
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