US President Donald Trump has made Huawei the biggest story in technology right now, banning it from doing business with US companies. Huawei, China's technological champion, has lost access to Google's Android and Intel's chips, and has also seen other international partners such as ARM and Panasonic, who bow to US influence and closing trade. Having been on the way to the world's largest smartphone maker, Huawei is now in such a fierce style that the best metaphor of its founder could fear fearing is that the company is like a plane with a hole in its side: don't do Great but still up in the air.
Bludgeoning Huawei with the Forbidden Hammer is, at Trump's own recording, a negotiating strategy to focus China's attention on American dissatisfaction with the existing trade relations between the two countries. It lands on top of a pile of punitive 25 percent tariffs it imposes on many Chinese imports to the United States, and a promised further round of such tariffs on virtually all Chinese exports is conceivable.
Two Chinese observers tell The Verge that China very much cares about these restrictions in its main foreign market, and it has every incentive to respond, to alleviate sanctions or as a show of its own economic strength. But both agree that China has few, if any, good alternatives available.
Veteran diplomat Hosuk Lee-Makiyama asks the tip: "What has China left to oppose?" There are already tariffs on the few classes of goods that it wants to protect its internal market, and there are excluded US internet giants such as Google and Facebook, so what can China realistically threaten to do as a motor strike? Some observers, such as Ben Thompson in Stratechery note that "China took the first shots" in today's trade war when it threw out many American technology companies, and now the United States is finally responding.
I have two thoughts.
On the one hand, I am quite worried about the direction that is not so-called war in the US and China.
On the other hand, having settled with the great firewall for a decade …..
Part of me just want to say …
Get me a fucking river, China. pic.twitter.com/CeQ0PZz6jn
̵1; Elliott Zaagman (@ElliottZaagman) May 22, 2019
The Lowy Institute's Elliott Zaagman has spent the last 10 years living in and observing China, and he claims that the country's economic prosperity is more crazy than it first appears. China's "already at a point where the growth rate is not a production, there is an entry," meaning that the government sets the target it will hit every quarter, and the banks borrow to beat that number. Beijing has made more money expansion, he says, than the US Fed, Bank of Japan and EU combined. This has caused a number of poisonous property bubbles – as in homes, which have suffered the impact of people taking on debt supported by overpriced property. Talking to him and Lee-Makiyama, you get the feeling that China's economy is closer to a pyramid practice than a truly thriving giant.
Recognition is particularly risky because China's economy relies on ever-increasing trade with the world, as evidenced by the massive Belt and Road Initiative for developing land and sea routes for faster freight transport. And Huawei, even though it was a private business, has been very helpful in acquiring high value overseas business, with network infrastructure management, 5G equipment, and most recently premium smartphones. Lee-Makiyama notes that because the country lacks a social safety net, it cannot afford to take off the gas, which the Huawei setback inevitably represents. Economists say he has long held 6.5 percent economic growth as the threshold below which China cannot dip if it is to maintain its growing debt, and China reported 6.4 percent growth in Q1 2019, before Trumps Hardest rates were put into use.
It is in this context that we must look at China's seemingly formidable weaponry that it could distribute to the United States.
There are also more sophisticated forms of economic warfare. China has a trillion dollars of US debt, which it could dump in global markets and thus trigger an interest rate increase for the US economy. Washington Post s Robert J. Samuelson briefly explains the mechanics of this, but he claims that China would do almost as much harm to itself in the process. A decline in the US economy will lead to even less appetite for Chinese exports, the US dollar may also decline in value and make Chinese goods less appealing, and what the US tax authorities have left with China will also be less valuable. This illustrates the inherent symbiosis between Chinese production and US consumption, which together formed the backbone of the world economy over the past 20 years.
The most threatening retort since Huawei turned into a trade union of Trump, has been a visit by President Xi Jinping to a rare earth environment. This was a wordless reminder of China's dominance in collecting and treating rare earth minerals essential to every smartphone, laptop, hybrid car, and virtually anything more advanced than a gas stove. The CEOs of two US headphone manufacturers tell The Verge that China is the only place to buy neodymium magnets required for their products: one said China is the only source, the other said it controls 95 percent of the market. If you struggled to wait a few weeks for the sweet new Powerbeats Pro to go on sale, try to wait months and months for an alternative source of magnets.
And yet, as my colleague James Vincent has already said, rare earths are not the secret weapon China imagines to be. They are not so rare, the answer to Beijing, which prevents supply, would be to become economically viable and ramp up elsewhere, and the final result would be fewer jobs and fewer exports to China. Lee-Makiyama sees this as an unsustainable scenario and points to China's poor attempt to use rare earths as a trade battle with Japan and the United States in the past.
Finally, and of course, the Chinese government could only do so often to impose sanctions on US businesses operating within its borders. Even with some older model iPhone mount in India, the vast majority of Apple's smartphone business is built on Chinese land. Chipmakers are even more addicted, as an analysis by HSBC finds that Apple compatriot Qualcomm has 65 percent of revenue vulnerable to disruptions to China's trade. Other US technology companies with similar exposure include 54 percent of Broadcom, 51 percent of Micron, and AMD, Intel, and Texas Instruments, all of which account for at least a quarter of their revenue from continuing trade with China.
American consumers can also be hit by impositions on brick and mortar retailers. Chinese imports account for 26 percent of Walmart's goods, which are in the low end compared to a more typical number that Target is 34 percent, according to UBS. Further investigations from UBS say the Trump administration charges imposed on Chinese imports "could put $ 40 billion in sales and 12,000 stores at risk." The American Apparel & Footwear Association calls the next round of tariffs "a self-inflicted wound that will be catastrophic for the nation's economy." If tariffs are disastrous, what would a total ban on China look like? This is undoubtedly the most effective weapon Beijing could deal with in negotiations with Washington, but the corresponding hit on Chinese trade would be equally disastrous.
In Lee-Makiyama's estimation, no scenario entails that China turns off or disturbs business with the outside world will be tasty to the country financially. Even with its rapidly growing national consumer market, China still needs more consumers for its goods and services. And with Apple and its compatriots like Nike, General Motors and Walmart using millions of Chinese workers, Trump has the influence he needs to play hardball. That situation will not last long, warns the diplomat, and now it may prove to be the last good chance for the United States to lean on its interdependence with China. If the trade remains as it is, China will eventually grow its way to being colossal both as a producer and a consumer, and then American influence would be zero.