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‘It’s The Equivalent Of A Nuclear Bomb’: Trump’s Huawei Gamble Heightens Risk Of Sino-US Cold War

"It seems to us the war is indeed spreading beyond tariffs".

Eventually, it’s going to dawn on everyone that Donald Trump’s China crusade was an end in itself, not a means towards achieving a set of concrete policy objectives.

Sure, the administration could probably be convinced to deescalate the trade war if Beijing offered to acquiesce to any and all US demands. A wholesale surrender might be enough to ensure that Trump wouldn’t slap the country with still more tariffs, but even if Xi were to bend the knee, existing tariffs would likely remain in place and you can be absolutely sure that Trump would find a way to claim the Chinese weren’t in compliance later on down the road. Just ask Iran whether complying with the letter of an agreement with the US is enough to keep Trump from trying to drive your country to the brink of economic ruin.

The idea that Trump really doesn’t want this to end is something we’ve explored in these pages on a number of occasions, most poignantly in “Dream States: Why No Resolution To Current Political Conflicts Is Possible”. Here are a couple of excerpts which drive the point home pretty effectively:

There are no concessions that China can make that will restore American manufacturing “greatness” or that will result in a trade agreement that Trump would deem unequivocally “fair”. Similarly, there is no scenario in which Brussels could concede something on budget rules and/or immigration that will lead to an outcome that’s sufficient to pacify Salvini (and make no mistake, he’s the problem there – not Di Maio and not Giuseppe Conte). In the same vein, there is no Brexit deal that would somehow lead to an outcome that Brexiteers would be willing to accept as a “win”.

The reason that’s the case is that these populist agendas aren’t based on actual goals. They’re based almost entirely on the continual suspension of disbelief among large swaths of the electorate. Those voters’ willingness to persist in a dream state hinges entirely on these conflicts never being resolved, because once they’re resolved, reality will again come calling.

Those passages were written on August 25. Fast forward nearly nine months and the Sino-US trade spat has abruptly taken a turn for the worst after a deal was all but sealed, Salvini is back to insisting that Italy will flout EU budget rules despite the two sides having struck a tenuous truce last year and Brexit is as fraught as ever.

Markets don’t seem to fully appreciate all of this, and more narrowly, the gravity of the Huawei ban appears to be lost on at least some folks. We talked about this on Wednesday evening, when, just hours after Trump issued what was described as an “agnostic” order restricting telecom equipment sales on national security grounds, the Commerce Department put Huawei on a list that requires US entities trying to do business with the company to obtain a license.

Read more: Huawei Blackballed And The Return Of Raging Rates Moves: A Macro Odyssey

To say that decision complicates the trade discussions would be to grossly understate the case. This could effectively cripple Huawei. Eurasia Group called it a “grave escalation” which, in a worst-case scenario, could “put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement.”

In other words, Trump is trying to bury the company. That effort, if taken to its (il)logical extreme, could hamper the buildout of 5G across the globe. This administration is now quite literally impeding technological progress on national security grounds, which might be excusable if the world had any reason whatsoever to trust that Trump is acting in good faith. But when you consider that the Commerce Department also thinks Angela Merkel’s BMWs are a threat to national security, despite a lot of them being made in the United States, you can hardly blame the rest of the world for being skeptical.

That’s not to say there isn’t a laundry list of reasons to believe Huawei’s practices aren’t entirely on the up and up – there is. But, again, virtually all of Trump’s foreign policy decisions are counterproductive and the administration’s economic policies are potentially ruinous over the long term, even if they produce short-term gains for the domestic economy. 

During his Thursday interview with Fox Business, Wilbur Ross talked a bit about the Huawei decision. Here’s the clip:

 

Wilbur, octogenarian tech expert.

You’ll note that while Ross says the Trump administration “cannot force” America’s allies to blackball Huawei, officials have spent the last several months trying to do just that, and you can expect that push to continue. Let’s not forget that it was the US which compelled Canada to arrest Meng Wanzhou. That debacle has cost the Canadians dearly in terms of their relationship with Beijing. Indeed, China formally arrested Michael Spavor and former diplomat Michael Kovrig on Thursday. Here’s what China’s foreign ministry said during a news briefing:

According to Chinese prosecutors’ approval, Michael Kovrig, due to being suspected of crimes of gathering state secrets and intelligence for foreign (forces), and Michael Spavor, for being suspected of crimes of stealing and illegally providing state secrets for foreign (forces), have in recent days been approved for arrest according to law.

Canada isn’t amused. “Canada strongly condemns their arbitrary arrest as we condemned their arbitrary detention on December 10. We reiterate our demand that China immediately release Mr. Kovrig and Mr. Spavor”, Ottawa said.

Of course, China “strongly condemns” what it considers to be the equally “arbitrary arrest” of Meng, and as has been clear for months, until such a time as she is released or Donald Trump intervenes on her behalf, the fate of Canadians in China hangs in the balance.

Read more: Kovrig, Meng, Spavor, Rodman And The Twilight Zone We Now Call Reality

At the same Thursday briefing, Chinese foreign ministry spokesman Lu Kang commented on the Huawei drama. “We urge the US side to stop such erroneous practices, create conditions for normal trade cooperation between businesses of the two countries and avoid further impact on China-US economic and trade relations”, Lu said, adding that Beijing “opposes the enlarging of the national security concept and abuse of export-control measures.”

Separately, Mofcom spokesman Gao Feng told reporters Beijing would take “all necessary measures” to defend Chinese companies.

Meanwhile, Huawei’s Western Europe Chairman Vincent Pang told an event in Paris that the company takes cybersecurity issues “very seriously”. “In the past 30 years, Huawei hasn’t had any cybersecurity issues”, Pang remarked. He also indicated the company is open to talking about “no backdoor, no spying” agreements with any country and insisted that Huawei has put in place contingency measures in case it can’t buy from Qualcomm. You can justifiably roll your eyes at some of that, but the same goes for anything that comes out of Trump’s mouth or emanates from the presidential Twitter feed.

Trump’s aggression will obviously impact semi stocks, including Micron, which derived some 13% of its revenue from Huawei over the last two quarters, Morgan Stanley said Thursday. “Huawei has said it devotes about a third of its budget — some $11 billion annually — to the acquisition of American components”, Bloomberg reminds you. “It counts 33 U.S. companies among its top 92 suppliers.” Micron shares were sharply lower in early US trade and shares in Huawei suppliers fell overnight.

On the flip side, Nokia and Ericsson rallied because, well, because the US is trying to drive their competitor out of business.

“This is going to be very messy”, a China-based source at a US tech company told Reuters, describing possible retaliation against US companies, including Apple. The source added that none of Huawei’s US suppliers “can be replaced by Chinese ones, not within a few years, at least [and] by then, they are already dead”.

“The Huawei case can be highly damaging, as it could trigger more voices in China’s policy circle against US business interests in China”, Deutsche Bank’s Zhiwei Zhang wrote in a Thursday note, cautioning that Wednesday’s decision was just the latest in “a series of recent events [which] indicate bilateral relations between China and the US are deteriorating quickly.”

The bank now assigns a 60% chance that no deal will be reached before the G20 and that Trump will move ahead with tariffs on the remainder of Chinese exports to America. “It seems to us the war is indeed spreading beyond tariffs”, Deutsche lamented.

Another executive (from one of Huawei’s chip suppliers) told Reuters the following:

Huawei being unable to manufacture network servers, for example, because they can’t get key U.S. components would mean they also stop buying parts from other countries altogether. They can relatively better manage component sourcing for mobile phones because they have their own component businesses for smartphones. But server and network, it’s a different story.

If Huawei is cut off from suppliers such as Qualcomm, Intel and Broadcom, “the effect could be catastrophic for the millions of people who use Huawei smartphones and for the mobile networks, across a wide swath of the planet, that run on Huawei gear”, the New York Times said Thursday, marveling at the sheer scope of what the Trump administration is hypothetically threatening to do.

Kevin J. Wolf, a partner at the law firm Akin Gump Strauss Hauer & Feld and a former assistant secretary of commerce under President Barack Obama, called it “the trade equivalent of a nuclear bomb.”

“In every other administration, the entity listing was purely a tool of law enforcement and national security [so] the thing to watch is whether this will become a tool of trade policy and used as leverage in the negotiations”, Wolf told the Times.

Spoiler alert: It became a “tool of trade policy” on Wednesday evening, just as Meng Wanzhou was similarly transformed into a source of leverage in December when she was arrested at the behest of the US government while Trump was dining in Buenos Aires with Xi Jinping.

We’ll leave you with a somewhat useful video from the Center for Strategic and International Studies, whose Scott Kennedy said Thursday that Trump’s move “could potentially lead to Huawei’s destruction… and threatening it in this way will generate a massive public response as well as from the Chinese government.”

 

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6 comments on “‘It’s The Equivalent Of A Nuclear Bomb’: Trump’s Huawei Gamble Heightens Risk Of Sino-US Cold War

  1. Anonymous

    Well, that escalated quickly.

  2. Anonymous

    While I agree with much of this, the silence from democrats speaks to there being a greater concern than that which is available to the public eye.

    • Yeah, I mean there are obviously legitimate concerns. But as I hope came through, it’s hard to take Trump completely seriously because i) he’s using this as leverage in the trade dispute, and ii) he’s crazy.

      if any other president would have done this, I imagine it would have gotten across-the-board support, but then again, if this were any other president, it would have been carried out and communicated in a completely different fashion and it wouldn’t be going on against the backdrop of an increasingly ridiculous trade war

  3. Best Post in a long while H…..Ya’ get an A+…..Covered the reality well…

  4. Anonymous

    Since the first day that Trump took office, his “policies” primarily in the form of executive orders, like his tweets, have been nothing but a re-election campaign to show him as a tough leader.

  5. and the puppet master just smiles.

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