With President Trump laying the groundwork for China's next round of tariffs, which will be launched on June 24, at the earliest, it's time to explore the wider landscape in areas that have a Trade wars go into a technological Cold War, which is one of the main causes of hostility to trade between the two countries.
It should be remembered that the trade war is the end result of a long-term build-up of tension between the US and China. Although many people have criticized Trump's argument to kick-start the current situation (the dollar imbalance between imports and exports has always been a pretty meaningless measure, since much of the value chain of the technology is ultimately for US companies), Republicans and Democrats For a long time, there have been great concerns about Chinese trade practices.
The real problem – China is forcing technology transfer and finding geopolitics dominance
However, there are numerous real issues Chinese economic and trade policy, and this is the point to which current events refer. China has been working hard on smart programs, notably the Made in China 2025 plan, which aims to reduce the country's dependence on foreign technologies by promoting indigenous technologies, as well as the Belt and Road initiative Developing countries to build Large infrastructure projects to promote economic ties in a modern Silk Road to promote Chinese goods and trade.
These systems formalize much of the problems that the West has with Chinese business practices, particularly those companies seeking access to Chinese markets and consumers. Typically, form joint ventures with local companies to facilitate technology transfer for valuable intellectual property unofficially. China now has its own companies that can manufacture x86, ARM, and other processing units, and has the supercomputer top 500 list with 229 Chinese systems (the US ranks second with 108 as of November 2018, although this is currently the # 1 Case is) hold both the first and the second place).
Where We Are Now – Escalating Tensions and Chinese Business Goals
The high-level issues, however, are obviously tariffs It is also clear that the trade war is about the mere Escalation has gone beyond. Last year, the US chose ZTE as a target after conviction of sanctions against Iran and North Korea and effectively prevented US companies from doing business with the company. The obvious and immediate result was effectively the short-term death of ZTE until it was thrown on the table as a negotiating ground in the trade war between the two companies. The US accepted a fine and corporate restructuring as acceptable to get the business off the ground Business is back on track.
With the US successful, it is now clear that they are pursuing a similar strategy, with the recent focus on Huawei, the undisputed jewel in the crown of Chinese technology companies. However, Huawei has apparently not been idle since it saw what happened to ZTE last year, and has both increased chips and worked to reduce dependence on US software and hardware with its own HiSilicon chip unit The difficulty is that the US has put Huawei on its entity list and some non-US companies like ARM (now owned by SoftBank TYO: 9984) also have theirs Working with Huawei and Microsoft have hired affiliates like HiSilicon. It should be noted, however, that although these companies may no longer cooperate with Huawei and other Chinese companies, the US name, the ultimate goal of China, however, was not to need these companies anyway.
However, it is clear that China would have been better able to rely on foreign technology We did not want access to foreign technology enforced, and it remains to be seen whether Huawei and other Chinese companies are ready for a protracted trade war in which critical technologies become unavailable are. Even if the "Made in China 2025" plan was successful, there are still six years to go before it can be realized. Therefore, it is likely that the withdrawal of foreign technologies will cause China pain.
That's not the case Only silicon is what we are looking at here. It is worth noting that this forced transfer of intellectual property in China is cross-industry. A notable example of this are the auto industry and the major international automakers seeking a joint venture with a Chinese auto company involving all the major companies such as Volkswagen, Ford, GM, Toyota, Mercedes, Jaguar Land Rover, Peugeot and others all seeking the most critical secrets not to pass them on to their Chinese "partners" who allow them access to sales to Chinese consumers.
Now that we have a US tech startup, CNEX claims that Huawei has stolen his trade secrets to find out how difficult it will be to prove the transfer of intellectual property against Chinese companies. Huawei, for its part, is suing CNEX for IP theft. The US obviously has a judiciary that should be independent of the other government departments, and although the firm is small, it will be interesting to start the process for both cases on June 3.
] Where to go next? Deals, Lawsuits, WTO and Rare Earths?
Although the US can prevent companies from cooperating with Chinese companies they do not like, this is a legal mechanism, not a technical one. Although ARM may no longer be talking to HiSilicon or licensing its newer designs for use with the company, this does not prevent HiSilicon from continuing to develop its own chips. It simply stops them from licensing ARM designs and getting support. This means that HiSilicon may face its own processes because it uses unlicensed ARM technology. The difficulty then is to make Huawei or one of his devices stop doing what it does and what it does to make an important distinction. For his part, President Trump has made it clear that the situation with Huawei can now be negotiated under a broader trade agreement. Whether or not this is taken up depends, at least in part, on how independent Huawei really can be.
If China wants to continue on its current course, the US can not stop it in the short term other than making life very difficult for the Chinese and hoping that the people in China will be so upset with their leadership that they are the current one Procedure no longer continues. President Xi's recent uproar of nationalist sentiment calling for a new long march in the face of American aggression is considered by many to be a test of water to persuade the population to stand up and support Chinese companies and products during the trade war Although the current action against China is being supported by both sides, Democrats can try to capitalize on the economic weakness resulting from the trade war.
President Trump rightly believes that the Chinese people may be hoping to negotiate with a subsequent president about the terms of him (possibly a Democrat) who may not be as aggressive about the terms of a deal. Of course, Trump does not have more than 6 years in the White House. It is indisputable that the Chinese economy is being burdened by the ongoing escalation. However, China is not without its own cards, though it has mostly played its side cards, and the remaining cards may be unpleasant for several reasons.
Tariffs on the US are the smaller cards, it can be said that they reach a point where they can not do much, as the US obviously imports more from China than vice versa, and the US continues to impose tariffs on additional ones can do goods long after the Chinese have run out of things to do the same. However, the most recent tariff proposal the US may submit in June has a notable gap, and it is not surprising that these are rare earths.
As we have described in our exclusive article about decoupling of Western technology industry from China in December (here) houses the largest rare earth reserves in the world. It not only has the largest reserves, but is also the largest producer. It is estimated that its production ranges between 80% and 95% of the world supply. Although some may argue that this is not a big deal because rare earths are not that rare, this misunderstands the problem.
As with oil, the difficulty with rare earths is not that they are scarce. The difficulty is that the cheap oil is scarce (apart from environmental problems). While it is quite possible that the world could adjust and increase production elsewhere than in China, there is enough time to cushion a short-term supply shock. However, a plant that mines and refines hundreds of thousands of tons per year is not a spring. If they are in operation overnight, they tend to be more expensive, as we can assume that market efficiencies have driven production primarily to China, as this is cheapest place is to produce them reliably. Yes, that does not mean that we no longer have electronics products whose production is based on rare earths. However, it is likely that the cost of these products will increase if they are tariffed or exported. Large-scale controls will result in higher production costs, lower profit margins and thus poorer business performance, and will translate into a deteriorating stock market.
This was promised after a visit by President Xi to a Chinese Rare Earth facility last week, which was widely seen as an allusion to the fact that this is a map that China could theoretically someday play if the trade war continues escalated.
In addition, some now begin to speculate that China could also start retaliating against some US companies. The specter of big western companies losing access to nearly 1.4 billion consumers in China is not very nice. As the trade war increased last year, technology stocks suffered heavily. Since then, the reassurance of the US in the form of the so-called "trump put" has prevailed to allow the market to offset most of its losses in the fourth quarter of 2018. The Trump put refers to the fact that the president will always act to shore up the stock market and, if necessary, erase the bigwigs of the administration in order to calm the markets and keep things on an even keel. Worrying statements in recent earnings reports from major technology companies, such as Apple (NASDAQ: AAPL), NVIDIA (NASDAQ: NVDA), and others, that demand for their products in China is waning, have given investors appetite for companies with high exposure to China The trade war breaks down.
China has been cautious about attacking Western companies directly, as did the US Chinese companies ZTE and now Huawei. However, there is no doubt that China should block access to its markets. For some of these companies, this would mean a significant escalation of the trade war and the stock markets would suffer. It is likely that the president would blame this on the door of his troubled Fed Chairman Jerome Powell for raising interest rates, but in that case it would probably be a combination of both things and other factors. 19659003] The other card that China owns is its massive holdings of US government debt. Currently, concerns are over $ 1.2 trillion, with data showing that China sold about $ 20 billion in March, raising concerns that China might try to arm the holding. Something that would undoubtedly give the US a reasonable amount of economic discomfort, but also an uncomfortable opportunity for Beijing.
The difficulty with China's cards is that they will also hurt China when they are played. The US cards being played are no different in that they hurt Americans in terms of higher costs for some consumer goods, lower revenues for some industries that rely on China and inflation, but these are incremental changes that affect the US Consumers will not be intimidated The face looks like China would have banned Apple from doing business there and you just could not buy a new iPhone. The cost of an iPhone raised in the US means that consumers need to spend less on other items, or that they may upgrade less frequently, but the product itself remains available.
Similarly, China earns a lot of money with its rare earth production. A ban on wholesale exports could be problematic for the Chinese economy, increasing costs and causing supply problems for Western companies in the short to medium term.
As for the US Treasury weapon? Well, the Chinese holding currently has a value of $ 1.2 trillion. Dropping the market would hurt the US economy completely, but at the same time the value of the investment would collapse during the sale. You can not just put a trillion dollars in T-notes on the market and expect people to buy everything at the current price.
So we have a semi-floating state, while China is trying to figure out how best to respond. Since Trump insists that an agreement will not lead to the immediate lifting of tariffs until China changes its laws in the manner desired by the US and ensures compliance with the terms of the agreement, it may be in China's best interests to clarify matters down and play a waiting game. The stock market is definitely slowing down, as we would expect at a late stage in the business cycle.
Government and central bank power to keep the party running is almost exhausted as tax cuts expire, interest rates still at record global lows and the central bank's balance sheets filled with quantitative easing positions It's difficult to see what the global economy is can still do to keep the party going. Technology stocks with trade war risks between China and the US have suffered, not just the headlines, but smaller, but still important, suppliers such as Skyworks (NASDAQ: SWKS), Qorvo (NASDAQ: QRVO), Broadcom (NASDAQ: AVGO). LUMTUM (NASDAQ: LITE) and others have lost up to 25% of their market capitalization since tensions have increased with the recent round of collective bargaining. Chinese listed companies also suffer from it like Tencent (HKG: 0700).
Overall, however, it is believed that the US and the West are more likely to have a stronger economy than China, and although they will bear part of the brunt of a trade war, they will also have some advantages with probably greater trade between Western countries harvest results. However, what most of the models predicting this does not take into account is that it could trigger a global economic slowdown as both the US and China have large economies that drive large global consumer demand.
probably overdue, as we are currently in the midst of the longest bull market in history. It is difficult to see how both sides can come out of the current state of the commercial war from the current state. We will continue to discuss the state of the technology market, with more focus on some aspects. Technology comes from China, while the trade war breaks out in the coming years.