US-China trade, can it get even worse?

Business risk: High risk for US firms (tech and non-tech) operating in china or selling in the Chinese markets and all firms supplying these firms. High risks for firms worldwide that use Chinese technology and have strong links to the US.

Huawei Mate smartphone. Credits: Kārlis Dambrāns

Yes it can get worse! President Donald Trump escalated his trade war with China earlier this month, ramping up tariffs on about $200 billion of Chinese goods, prompting Beijing to retaliate with further duties of its own. Trump and his counterpart Xi Jinping are expected to meet again at the end of June for the G-20 summit. Some analysts predict a resolution during the summit, but we expect no significant progress.

To make things worse. Washington blacklisted Huawei, barring US companies from selling to the group. This will probably affect about 1,200 US suppliers to the telecom group. Google has already stopped providing some hardware and services to Huawei. Huawei fights back by initiating a lawsuit in the US, arguing the blacklisting is unconstitutional.

The Chinese fight back. by raising the issue at a meeting of the WTO market access committee, arguing the ban is against WTO rules. They also threatened to use rare earth export controls to hurt the US. Rare earth are (not so rare) materials that are essential for modern electronics and which are mainly produced in China (more than 80% of global production). In 2010 China used an (informal) rare earth export ban in a conflict with Japan over a Chinese fishing boat that was caught by the Japanese coastguard in disputed waters.

China also put its purchases of US soybeans on hold. Purchases were resumed earlier as a goodwill measure after the US and China seemingly agreed on a truce in their trade conflict in December last year. In this way, they directly strike the American mid-west, core Trump country, that has been suffering hard from the retaliation in the trade wars by numerous countries. Profiting the most are Brazilian soybean farmers.

China is also retaliating by warning students and tourists of the risks of studying in and travelling to the US. This could be a huge financial drain for US universities and the tourism sector with more than 300 000 Chinese studying in the US and tourists spending almost $40 billion in 2018.

US companies fight back. More than 170 US footwear companies wrote a letter to the President to argue that the additional 25% tariffs on Chinese imports would be:

catastrophic for our consumers, our companies, and the American economy as a whole.

An IMF report made clear what most experts believe but what President Trump vehemently denies that it are US importers and not Chinese firms that are bearing the brunt of the tariff costs. In addition to US farmers that suffer most of the retaliation to the US new trade policies, the trade conflict seems to be creating more losers than winners in the US. Whether this will have an impact on US policies seems doubtful as the US President is extremely convinced of the contrary. His beliefs on trade policies date back to the 80s and are a small part of his ideas that don’t have changed over time.

Welcome to a fractured world. The technology sector is increasingly getting fractured between a US and a Chinese side. The software and internet sectors have known this bifurcation for a long time. The Great Firewall has for decades separated the Chinese internet from the rest of the world. Chinese internet service firms like Weibo have been able to grow overwhelming market shares because China blocks Western tech giants services like Google or Facebook. Now the physical side of the tech world that is strongly intertwined between the US and China has been drawn in the US-Chinese tech cold war. The blacklisting of Huawei, the pressure the US is exercising on its allies to join in the ban and the retaliatory measures China will take on US firms, all point to an icy summer in the tech world. Firms like Apple with a sizeable Chinese part in their supply chain seem especially vulnerable for retaliation. The same counts for other American firms with a large China operation like General Motors.

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