New tariffs of $ 300 billion of Chinese goods in-depth – Huawei and rare earths in Play?

As President Trump lays the foundation for the next round of tariffs on China that can be imposed earlier than June 24, it is time to investigate the wider landscape of what is going on over a trade crisis and into a war of technology which is one of the major facets that drives commercial hostilities between the two countries.

It is worth remembering that the commercial war is the end result of a long-term tension building between the United States and China. Although many have been critical of Trump's rationale for shooting the starting gun on the current situation (the dollar-to-export ratio has always been a rather meaningless measure given the ultimate earning of much of the technology chain to US companies) both Republicans and Democrats have long had major concerns about Chinese trading practices.

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The real problem – China forced technology transfer and the search for geopolitical dominance

There are many real issues that exist with Chinese economic and trade policies But, and this is the point of what is happening now. China has made a big deal on snazzy programs, especially the Made in China 2025 plan, which aims to reduce the country's dependence on foreign technology by promoting home culture technology, along with the Belt and Road Initiative to build the developing world with major infrastructure projects for promoting economic ties in a modern Silk Road that promotes Chinese goods and trade.

These schemes formalize much of what West has with Chinese economic practices, especially that companies seeking access to Chinese markets and consumers must typically form joint ventures with local businesses with the aim of unofficially promoting technology transfer of valuable intellectual property. China now has its own companies that can produce x86, ARM and other processing units along with pretty much owning the supercomputing top 500 list of 229 of the systems as Chinese (USA second place with 108 from November 2018, though it does at the moment hold both first and second place.

Where we are now – escalating tensions and Chinese business goals

High profile topics are obviously tariffs, but it is also clear that The trade war has moved beyond merely escalating these to each other. Last year, the United States turned to ZTE after finding it guilty of violating sanctions against Iran and North Korea, which effectively banned US companies from doing business with the company. The immediate result was effectively ZTE's short-term death until it was thrown on the table as a bargaining chip in the trade war between the two companies with the United States, and accepted a good and corporate reorganization. n as acceptable to allow the company to start its business again.

Having been successful here, it is clear now that the United States is following a similar strategy with its latest target audience for Huawei, the undisputed jewel in the crown of Chinese technology companies. But Huawei has apparently not been idiotic since it saw what happened to ZTE last year, and has been both a storage player and worked to reduce its confidence in US software and hardware with its own HiSilicon chip unit that is designing its own Kirin SoCs to further reduce their dependence on American hardware.

The difficulty is that the US, which places Huawei on the business list, has resulted in some non-US companies such as ARM (now owned by SoftBank TYO: 9984) also ceasing to work with Huawei and its subsidiaries such as HiSilicon. It is worth noting here though that although these companies may stop working with Huawei and other Chinese companies, the name in the United States is called, the ultimate goal for China was that it would not need those companies anyway.

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Perhaps China would rather have been able to just stop using foreign technology Giving when it didn't decide it anymore needed it rather than gaining foreign technology with weapons removed from it, and it remains to be seen whether Huawei and other Chinese companies are ready for a long-lasting trade war that sees critical technology no longer available. Although the Made in China 2025 plan was successful, it is still another 6 years to come to fruition, so it is likely that withdrawal of foreign technology will cause some pain to China.

It's not just silicon we're looking at here though. It is worth noting that this forced transfer of intellectual property occurs in China across industries with the well-known example of the automotive industry, and most major international automakers have a bearing on having a joint venture with a Chinese car company, including all the major ones. Like Volkswagen, Ford, GM, Toyota, Mercedes, Jaguar Land Rover, Peugeot and others all try not to surrender the critical secrets of their Chinese "partners" that allow them to sell to Chinese consumers.
Now we have an American tech startup CNEX claiming that Huawei has stolen their business secrets in what is likely to be one of numerous lawsuits against the company to test the water about how difficult it will be to prove the transfer of intellectual property to Chinese companies. For its part, Huawei also sues CNEX who claims IP theft. The US has obviously a court designed to be independent of the other government's arms, and although the firm is small, the trial will be interesting to follow with the trial for both cases to be fired on June 3. [19659005] Where next? Offers, lawsuits, WTO and rare earths?

It is worth remembering, although the United States may cut businesses from working with Chinese entities it does not like, this is a legal mechanism, not a technical one. So even though ARM may not speak to HiSilicon anymore or license its newer designs to the company for use, this does not stop HiSilicon from continuing to design its own chips. It just stops them from licensing ARM designs and getting support from them by doing so. This means that time can come when HiSilicon faces its own litigation for using ARM technology without a license to do so, it will be difficult to actually use a lawsuit to get Huawei or any of the devices to stop doing what Do, and that is an important distinction to make. For his part, President Trump has made it clear that the situation with Huawei is now under negotiation as part of a broader trade. Whether this is taken up or not, probably at least partly depends on how Huawei's confidence can really be.

Realistically, if China wants to continue pursuing its current course, there is no way that the United States can stop it in the short term than by making life very difficult for the Chinese and hoping that the people of China will be dissatisfied with their leadership to stop it to pursue today's action. President Xi's latest touch of nationalist feelings demanding a new long march in the face of US aggression, is seen by many who test the water to push the population to stick with it and support Chinese companies and products while the commercial war is being drafted by the US Political landscape, although there is two-sided support on the surface of the current action against China, the Democrats may seem to exploit any economic weakness that comes from the commercial war.

President Trump rightly notes that the Chinese can hope to negotiate terms with a president coming after him (potentially a democrat) who may not be as aggressive on the terms of an agreement. Of course, Trump has a maximum of 6 years or so again in the White House. It will undoubtedly be a burden on the Chinese economy if the current escalation continues, but China is not short of itself, but it has mostly played its smaller cards, and the rest are potentially unpleasant for several reasons.

Tariffs on the US are the smaller cards in question, it is fair to say that these are now a point where it can not do much more since the United States obviously imports more from China than vice versa, the United States can continue to impose tariffs on additional goods for a long time after the Chinese have run out of things to do the same. But the latest proposal on tariffs that the United States can impose in June contains a remarkable neglect and surprising, these are rare earths.

As we covered in our exclusive piece about decoupling the Western technology industry from China in December (here), China has the world's largest reserves of rare earths. In addition to having the largest reserves, it is also the largest producer, and the estimates put production at anywhere between 80% and 95% of world supplies. Although some might argue that this is not a big deal, because rare earths are simply not so rare, this problem misunderstands.

As with oil, the difficulty of rare earths is not that they run out, the difficulty is that cheap oil runs out (environmental considerations aside). While it is probably possible to give enough time to absorb a short-term supply shock, the world will adapt and be able to ramp up production elsewhere than China, operations such as min and refine a hundred thousand tons per year, not spring upwards overnight, and When they do, they tend to cost more since we can probably assume that market efficiency has driven production to China because of the cheapest place to reliably produce them. As such, yes, it does not mean that we will no longer have electronic products that rely on rare earths to make them, but it is likely that the cost of these products would rise if they were to be tariffed or subject to export control in large quantities. scale, which leads to higher production costs, lower profit margins and thus poorer business performance, translating into a worsening stock market.

The prospect of this has been raised after a visit by President Xi to a Chinese rare earth plant last week, which was largely regarded as a nod to the fact that this is a short China could theoretically play at a time if the trade war escalates further.

In addition, some now begin to speculate that China could also begin retaliatory actions against some US companies. The spectrum of major Western companies that lose access to China's nearly 1.4 billion consumers is not a good idea. As the trade war hit last year, the technology stores suffered in a big way. Since then, US reinsurance in terms of what is referred to as the "Trump Pad" has proven to have allowed the market to recover most of its fourth quarter 2018 losses. The Trump case refers to the fact that the president will always act to support the stock market and, if necessary, roll out the administration bigwigs to calm markets and keep things on a smooth keel. But worried statements in recent earnings reports from major technology companies such as Apple (NASDAQ: AAPL), NVIDIA (NASDAQ: NVDA) and others to curb the demand for their products in China, have seen investor appetite for companies that are considered to have high commercial war exposure. falling away.

China is still cautious about targeting Western companies directly in the way the US has done to Chinese companies such as ZTE and now Huawei, but there is no doubt that China would close access to its markets to any of these companies, It means a great escalation in the commercial war and the stock market would suffer. The probability is that the president will blame this at the door of his besieged Fed leader Jerome Powell for raising interest rates, but in the event that it happens, it will probably be a combination of both of these things along with other factors. 19659003] The second card that China has is its huge holdings of US government debt. Currently, over $ 1.2 trillion, concerns were encountered this month when data showed that China sold about $ 20 billion of them in March, causing concerns that China might attempt to arm the business. Something that would make the US a reasonable level of economic discomfort without a doubt, but also an unpleasant opportunity for Beijing.

Wrapping Up

The problem with China's card is that if it plays them, they will also harm China. The American cards being played are no different because they hurt the 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 will not hit consumers face as if China banned Apple from doing business there anymore and you just couldn't buy a new iPhone. The cost of an iPhone that goes up in the United States will mean that consumers have less money to spend on other items, or they may want to upgrade less often, but the product itself will still be available.

Likewise, China earns a lot of money from its rare earth production. Prohibition of export wholesale may prove problematic for the Chinese economy, as well as increase costs and generate short-term supply headaches for Western businesses needing them.

For weapons of US government bonds? Well, the Chinese company is currently worth $ 1.2 trillion. Dumping them on the market would certainly hurt the US economy, but at the same time, the value of the attitude would collapse while the sale was ongoing. You can't just dump a thousand dollars into T-notes on the market and expect people to just buy everything at the current price.

So what we have left is a semi-limbo state while China is trying to figure out how to respond best. Given Trump's insistence that any deal will not result in immediate raising of tariffs before China changes its laws just as the US looks for and ensures compliance with the terms of the agreement, it can simply be in China's best to just test things down and play a waiting game. The stock market is definitely declining as we expect this late in the business cycle.

The state and central bank's firepower to keep the party going, is almost exhausted because the tax cuts expire, the interest rate is still on the world record and the central bank's balances filled with quantitative easing positions are hard to see what the global economy can do for to keep the party gone. Technical shares with China / US trade war exposure has suffered, not only the headline names, but also smaller but still important suppliers like Skyworks (NASDAQ: SWKS), Qorvo (NASDAQ: QRVO), Broadcom (NASDAQ: AVGO) Lumentum (NASDAQ: LITE) and others have cut as much as 25% of their market value since the excitement increased with the latest rate. Chinese listed companies also suffer as Tencent (HKG: 0700).

Overall, it is believed that the probability is that the United States and the West have stronger economies than China, and although they will certainly bear some of the brunt of a trade war, they will also reap some benefits with probably greater trade between Western countries. What most models predict this does not take into account, but this may be the trigger for a global economic downturn since both the United States and China maintain large economies that demand a lot of global consumer demand.

This says a lot, a recession is probably delayed given that we are currently in the middle of the longest bull market in history. It is difficult to see how each side can climb down from the current state of the trade war with what is currently set up, for our part, we continue to discuss the state of technology with an increasing focus on some of the technology coming out of China as a trade war. in the coming years.

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