Friday’s likely escalation of the US-China trade dispute into a full-scale financial war will damage the US tech, IoT, and connected transport sectors, says Chris Middleton.
The trade dispute between the US and China may cease being a war of words this week and become a full-blown financial battle, if the US implements $34 billion in import tariffs on Friday and China responds in kind.
The White House has cited systematic Chinese theft of US intellectual property and forced technology transfer in trade deals as the reasons for the looming battle, which could also be seen as the world’s largest economy, the US, responding to the inexorable rise of the world’s second largest.
China’s stated mission is to lead the world in robotics, AI, autonomous transport, and other technologies, and is investing many billions of dollars in realising that ambition, through central and local funding, startup venture funds, and business partnerships.
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On Friday (6 June), a 25 percent US import tax may be applied to a basket of over 800 Chinese-made products, including industrial robots, electric cars, and electric bikes and scooters – moves that may damage US businesses that are innovating in areas such as manufacturing automation and frictionless, on-demand transport, including electric bike hire.
Earlier this week, Alphabet joined a $300 million funding round for electric bike startup Lime, while Uber’s JUMP brand is gearing up to launch a $12-a-week electric bike subscription to fend off fierce competition from Lyft.
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Electric bikes and scooters are increasingly regarded as central to the on-demand urban transport mix of the future, and are popular among millennials. Many bikes are manufactured in China to keep costs down, and so any 25 percent uptick in prices would inevitably be passed onto the consumer, not to mention onto any company running fleets of the vehicles.
Within China itself, no such restrictions will be placed on those industries by any escalating trade war.
Smart home prices
While the US government has claimed that consumer electronics will not be drawn into the dispute, other affected products include connected home devices, such as smart thermostats and internet-connected lights – moves that may again impact on Alphabet, via its Nest acquisition, and companies such as Philips, which manufacture LED products in China.
If power-saving products such as LEDs and smart thermostats become less affordable, this could damage the smart home, connected-device, and IoT sectors just as they are expanding. One indirect effect of this would be to push up utility bills for US customers by discouraging them to manage their own energy use. That, in turn, would have a cumulative environmental impact – as would any moves that make environmentally friendly technologies more expensive.
China’s probable response in kind with tariffs of its own may trigger retaliation from the US in the form of a further $200 billion of Chinese goods being hit by a 10 percent import tax, and a threatened $200 billion of goods beyond that, according to statements by the Trump administration.
A potential total of $450 billion of Chinese products being hit with import tariffs represents 89 percent of the total value of US imports from China in 2017, according to Internet of Business’ calculations. By comparison, the US exported nearly $130 billion of goods to China last year, according to the FT.
Conceivably, therefore, all of US-China trade could be hit by an escalating trade war, which may draw in China’s allies and neighbours, including Taiwan (officially the Republic of China).
If so, that could have a significant impact on any business that manufactures goods in the region, including Amazon, Cisco, Dell, Google, Hewlett Packard, IBM, Intel, Microsoft, Motorola, and Nike, together with the US’ most valuable company, Apple, and the world’s biggest by revenue, Walmart.
The communications sector has also been drawn into the dispute. The Trump administration cited national security concerns to deny China Mobile entry into the US market yesterday, in a move that could hit all Chinese companies that are currently working in the US, or partnering with local operators.
Meanwhile, numerous American and European companies work in China, sell to China, or are engaged in ongoing research and market-sharing partnerships. After all, in pure population terms, China is over four times the size of the US. As such, it represents an enormous untapped market for Western goods and services. The recent opening up of China to the West has created more business opportunities, not fewer ones.
That said, there is another dimension to this. According to the FT, Chinese investment organisations – some of them linked to the government – participated in up to 16 percent of all venture deals in US early-stage technology companies between 2015 and 2017, meaning that as some US tech startups succeed, China will benefit.
Plus: ZTE wins brief reprieve
China’s ZTE has received a temporary reprieve from the US government until 1 August to conduct any business necessary to maintain its existing networks as it works toward lifting the White House’s US supplier ban. The company has also agreed to pay a $1 billion penalty and put $400 million in escrow to resume business with US, which provides almost one-third of the components used in ZTE’s equipment – evidence that the component war that may result from any trade war will be fought on two fronts, with potential casualties on both sides. ZTE may be haemorrhaging business, but so may its US partners.
Internet of Business says
It’s difficult to see who could benefit from looming trade disputes that, according to the White House, could extend to the EU, Mexico, Japan, and even Canada. The FT believes that a $1 trillion global trade war could be on the cards.
While the US has genuine concerns about connections between the Chinese government and companies such as China Mobile, Huawei, and ZTE – concerns shared in the UK, where Huawei is monitored by GCHQ – national security has been cited in the broadest possible sense in Trump’s repeated threats to impose tariffs on imported cars, trucks, and automotive parts from Europe and Japan.
If European carmakers such as BMW (including Mini and Rolls Royce) and Volkswagen (including Audi, Bentley, Bugatti, Lamborghini, Porsche, Scania, and SEAT), along with Japanese companies like Toyota and Nissan, find they are unable to export to the US without being hit by punitive tariffs, that may undermine the ongoing partnerships between those companies and US technology giants in the development of autonomous and connected vehicle systems.
The subtext is clear: the US believes that its manufacturing sectors are under threat, primarily from Chinese expansion, and that means its current position as the world’s biggest economy needs protecting. But is aggression, isolationism, and trying to derail the Chinese economy the right approach, when the US would be severely hit by the backdraft, damaging some of its own businesses, not to mention important global partnerships and its reputation on the world stage?
How much damage may be done indirectly to the critical US technology sector by these policies can only be guessed at. If US companies are coerced into repatriating their manufacturing from Asia, the knock-on effect would be soaring technology prices worldwide – and not by small margins.
And the damage wouldn’t stop there: Chinese components and IP sit at the heart of many popular American devices too, including smartphones and tablets, something that the White House has apparently overlooked in its – reasonable – protests about intellectual property theft and forced technology transfer.
So is this just a war of words – a show of strength – soon to be accompanied by a change of tack to wrong-foot Beijing and force trade and IP concessions? President Trump has form in that regard. Either way, we’ll find out on Friday whether it’s MAGA or the beginning of a mega-problem for the US technology sector.