US hits button on China trade war – tech at risk

US hits button on China trade war – tech at risk

UPDATED In the early hours of this morning, US president Donald Trump pushed the button on a trade war with China, escalating it from a battle of words with Beijing into a full-blown financial conflict.

As threatened, the US has imposed 25 percent import tariffs on a basket of 818 goods, including: electric bikes and scooters; industrial robots and machinery; machine parts; smart thermostats; LEDs; optical scanners; disk drives, smart cards, optical media, tape drives, and computer storage devices; electrical components; wires and cabling; conductors and semiconductors; imaging systems; spectrometers; radar equipment; lasers, flat-panel displays; lithium batteries; medical equipment; and planes, trains, automobiles, ships, and spacecraft.

In total, $34 billion of imported goods will be affected by tariffs that are designed to impact on China’s growing industrial and technological strength. China has indicated that retaliatory tariffs will take effect immediately.

However, the explosive trade measures – ostensibly designed to punish China for IP violations, a policy of national investment in US technology research, and unfair trade practices – could create a backdraft that sweeps through the US tech, IoT, IIoT, connected transport, manufacturing, and other sectors.

An escalating conflict could also 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 already been drawn into the dispute. The Trump administration cited national security concerns to deny China Mobile entry into the US market earlier this week, in a move that could hit all Chinese companies that are currently working in the US, or partnering with local operators.

National security has also been cited in the broadest sense in recent weeks by the US in threats to impose tariffs on cars, trucks, and automotive parts from the EU and Japan.

Escalating conflict

Last night, Trump threatened tariffs on up to $500 billion of Chinese goods – nearly the total value of Chinese exports to the US in 2017 ($505.5 billion). By contrast, US exports to China totalled just $130 billion, apparently limiting China’s capacity to retaliate.

However, as a market of 1.3 billion people (four times the size of the US population) China’s ability to obstruct US businesses, along with bilateral trade and research partnerships, could be damaging to any companies that do business in the region, or wish to expand their horizons by selling into the world’s biggest consumer market.

A more extreme weapon in the trade war would be for China to devalue the yuan renminbi, counteracting the effects of US tariffs by making its exports cheaper.

While the currency has been undervalued at times in the past, the International Monetary Fund said in 2015 that this was no longer the case, due to rapid growth in the Chinese economy and accompanying currency appreciation. Devaluation must therefore be considered a realistic option.

More, any relaxation of currency controls in China in the longer term could open the door to the renminbi becoming a true global currency.

While the US believes that the discrepancy in export values gives it the clear economic advantage, the reliance of many US and Western businesses on low-cost Chinese goods, components, manufacturing, and labour represents a dangerous counterbalance, which threatens the US technology, industrial, and manufacturing sectors.

The 25 percent uptick in prices on imported components and goods forces up US companies’ costs, threatens their supply chains, and risks making technology more expensive for everyone.

More, Wall Street sits at the heart of the US economy, and so any market nerves and flight of investment would hit the US where it really hurts: its self image. Today, however, the stock markets seem calm, with tech stocks performing well or holding their value.

But the trade war may yet cause serious complications for the US. China owns over $1 trillion of US debt – roughly one twentieth of the national debt, and one-third of the amount owned by foreign investors. Coincidentally, $1 trillion is roughly the amount that the US needs to borrow every year for the foreseeable future, making the US economy vulnerable to Chinese retaliation at a fundamental level: US consumers’ pockets.

Last week, US conservative economist and former Reagan administration employee David P Goldman called the situation “a tragedy in the making”, suggesting that an economic war of attrition now begins, with each side sustaining major losses until one or other eventually capitulates.

With the combined value of the US and Chinese economies, in nominal GDP terms, equalling $30.6 trillion, the effects of a global war of attrition can only be guessed at.

Goldman quoted Chinese trade ministry economist Mei Xinyu’s recent warning that China will pursue such a war on many fronts in response to what it sees as American protectionism, rather than as punitive measures against China for IP violations.

Wei said, “When we had our first trade conflicts with the US in the 1990s, the US economy was 15 times bigger than the Chinese. Today it is 1.5 times bigger. Not that we wanted a trade war back then – we could not afford it. Today we can afford it.”

Internet of Business says

Minutes from the Federal Reserve’s June meeting revealed that some companies have begun scaling back or postponing capital spending due to “uncertainty over trade policy”, reports the FT this morning.

The FT predicts that the value of Trump’s trade war could potentially pass the $1 trillion mark, as conflicts brew between the US and its other major trading partners, including the EU, Japan, Canada, and Mexico.

In short, 2018 could see the US increasingly angry, volatile, unpredictable, and isolated on the international stage, rather than dominating trade as the world’s biggest economy.