U.S./China Trade War May Only Be Beginning

US China Trade War

While several shots have been fired on both sides using tariffs as the main weapon, the U.S. looking to blacklist Chinese telecom giant Huawei is a bigger threat than it appears.

It’s no secret that Huawei has a special place in the hearts of the Chinese government, and a much bigger place than we may think at first glance. In the ongoing battle between the United States and China on the trade front, the United States blacklisting Huawei may represent the real guns being put on the table.

In addition to being a major manufacturer of mobile equipment, Huawei is a leader in 5G technology. Fears of the Chinese using the company for darker purposes such as espionage and hacking has already evoked a response in several countries, including in the United States, where the company has either been shut out of the 5G market or this is being seriously considered.

Some countries, like Canada, are on the fence with this issue, looking to balance security with the prospects of having this issue negatively impact trade relations with China. By most accounts, this threat is a very real one, and not just something that is being trumped up to benefit American business or as a negotiation tactic, as there are genuine and serious security concerns at play.

When Canada arrested Huawei CFO Meng Wanzhou last December, the Chinese showed more of their hand. This one incident threw the Canadian/Chinese relationship into turmoil, and China immediately responded by arresting two Canadians on very questionable grounds and promising a lot more if the situation is not resolved to their satisfaction.

Huawei is supposed to be a private company, but when we look more closely, it is pretty clear that the Chinese government has a big hand in it, and Huawei may represent a powerful tool to them that extends well beyond just making a profit by selling telecommunications equipment.

The Chinese response to the arrest of Meng was in no sense measured, promising “grave consequences” if she is not released. Few interpreted this as mere rhetoric and there was little question about how serious China was about this issue. This would seem very out of proportion until we realize that this company may just be that important to the Chinese. Sure, Meng may be the daughter of Ren Zhengfei, the company’s CEO, and Ren no doubt has quite a bit of power, but we wouldn’t think he had anywhere near this much.

Both Meng and her father are senior members of the Chinese Communist Party, and Ren is believed to be particularly influential, so these are not your typical executives by any means. In Western countries, we see situations where big business influences governments, but in the case of Huawei, they are sitting right at the big table and exert their influence much more directly.

Going After Huawei Strikes at the Heart of the Chinese Government

It is not a stretch at all to view Huawei as the Communist Party’s own, and actions against the company will therefore be subject to being met with a very fervent response. This strikes the Chinese government not at the periphery, but at its heart.

The big threat in this drama was Canada allowing Meng to be extradited to the U.S. to face charges, and if all of this touched a nerve with the Chinese, we may have wondered what would happen if the war itself against Huawei became escalated.

This has now happened, with the Trump administration now looking to prevent American companies from doing business with Huawei. The real war is on with the company, as they do a lot of business with U.S. technology companies, including buying a lot of chips. Even their Google access is on the table with this, and this all is a serious threat to Huawei without question.

While China may not have been happy about the tariff escalations, which involve hundreds of billions of dollars’ worth of trade, and this latest escalation by Trump certainly did not help things, there wasn’t any real reason to think that the sides could not work this all out, and the raising of tariffs on both sides could even be seen as mere posturing as they continued to try to hammer out a deal.

This latest development with Huawei, where the U.S. is targeting them in a similar way to what they do with countries that they are at odds with, such as Iran and North Korea, has taken this trade war to a new level. This has a real potential to see negotiations reach an impasse, and perhaps even scuttle the talks if the U.S. is not prepared to relent.

The trade war between the U.S. and China could get much worse if things keep escalating, and the Huawei shot clearly delivered a big blow to China, and seemingly at least, a bigger one than either of the tariff hikes managed.

The Chinese Speak on This, and Tell Us This is a Clear Deal Breaker

Markets opened much lower on Thursday after Gao Feng, an official with the Chinese Commerce Ministry, stated that the U.S. must reverse its “wrong actions” before negotiations can continue. While we might think that what is being referred to as “wrong actions” involve tariffs, we do not have to read between the lines too much to realize that he was instead speaking of the blacklisting of Huawei.

Gao remarked that the U.S. “crackdown on Chinese companies not only seriously damages the normal commercial cooperation between both countries, but it also forms a great threat to the security of the global industrial supply chain. China is firmly opposed to this. If the U.S. would like to continue negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue. We will closely monitor the situation and make adequate preparations.”

The “adequate preparations” remark is perhaps the most ominous, as this suggests that the consequences of this extend beyond just an ending of talks, and strongly suggests that we may have not seen anything yet as far as how this war might go on account of this.

Gao is not speaking on his own here, as their government is far more integrated than Western ones, and we can take this as the official stance of the Chinese government on this issue.

The U.S. does have an out here, as the sanctions do involve doing business with the Chinese “without government approval.” We’ve already seen a relenting of sorts, albeit on a temporary basis, but nowhere near as much as would be required to make this problem go away.

The Huawei situation looks very much like it could become a deal breaker, and the Chinese have just told us this in no uncertain terms. Some of this might be rhetoric, but it is unlikely that this is all just a ploy, and they actually do probably mean this sincerely.

Now we really know how important Huawei is to the Chinese. They can’t bully the Americans the same way that they did with Canada, but they can dig in and prevent a successful deal from happening, as well as being prepared to see the trade situation between the two countries get worse, and perhaps, much worse.

Banning Huawei’s 5G networks in the United States is one thing, but trying to bring down a company so near and dear to the hearts of the Chinese government is quite another. Huawei is not even among the very biggest Chinese companies, and is absolutely dwarfed by the big ones and barely cracks the top 100. It obviously packs a lot more punch than we would think and could even bring down the biggest trade deal in history if this is allowed to fester.

This could even serve to cause the bear market with stocks that many have feared would come if this deal does not get done. There’s a lot at stake here, and U.S. officials need to realize the seriousness of the situation. The U.S. has few reservations about flexing its muscles anytime it wants to, but this is one instance where the consequences may not really make this one worth it.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: andrew@marketreview.com

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