Late last week, the US sent conflicting messages Beijing’s way ahead of the critical G20 meeting between Donald Trump and Xi Jinping.
On one hand, the US delayed Mike Pence’s human rights speech. That’s something of an olive branch. At “best”, Mike’s speech would have inflamed tensions at a delicate juncture and set the stage for sanctions on China’s controversial surveillance industry. At worst, the speech could have marked a turning point in US foreign policy. On June 4, Cowen’s Chris Krueger suggested Pence’s speech might go down in history with “the Marshall Doctrine and the Long Telegram, speeches that signaled generational foreign policy pivots”. So, the fact that Pence won’t be making that speech is good news.
On the other hand, the Commerce department put four Chinese firms and a research institute on the entity list, effectively blacklisting them alongside Huawei. Going forward, US companies will have to get a license from the government to do any business with the affected entities. Those license requests will almost invariably be denied.
That was a big deal and we tried to explain why in “Trump Slaps Xi In The Face One More Time, Goes After China’s Super-Computing Capabilities“.
Not being privy to whatever conversations are going on in super-computing circles (I’m sure there are web portals and chat rooms out there somewhere), I’m not certain it’s accurate to suggest that “everyone” is underestimating the gravity of Friday’s announcement. But what I do know is that the market doesn’t seem to care all that much. Although AMD and Lattice are down again to start the week after falling when the news hit on Friday (one of the companies Commerce blacklisted has a joint venture with AMD), the SOX was higher as of midday.
If the market is unconcerned about this issue, that apathy could be misplaced. Or at least according to SocGen.
“In our view, [the Commerce department’s announcement] sends another bearish signal to the semiconductor sector at a time when Apple smartphone suppliers could enjoy some relief via trade war detente”, the bank writes on Monday. “The addition of these five firms to the Entity List, coming right after Huawei… suggests that even intellectual property rights and spying concerns related to 5G deployment could be secondary issues”.
Over the past two months, concerns have mounted that the Trump administration no longer differentiates between trade policy and national security. To be clear, that line has always been blurry. Indeed, “national security” was used to justify the initial rounds of tariffs in the trade war. But with the Huawei ban and the Mexico tariff threat, it became clear that the administration is ready and willing to use tariffs and other economic weapons to secure leverage in arenas that have little, if anything, to do with trade.
Read more: ‘National Security’ As A Pandora’s Box
“The move against Huawei is important because besides adding the element of a tech war to a bilateral trade war, it now involves other economies and non-US firms who deal with Huawei as well”, SocGen wrote, in their latest quarterly economic outlook. “In other words, the bilateral trade war has become multilateral with the US dragging friends and foes alike into the conflict.”
The bank went on to fret that the Mexico tariff threat suggested “tariffs are being promoted as a kind of miracle cure for all possible issues that involve another country.”
In short, “trade war” no longer cuts it when it comes to describing Trump’s multi-faceted crusade against the rest of the world. Indeed, it’s not entirely clear what it is Trump wants out of all this anymore. As we’ve variously suggested, Trump himself may no longer know.
Well, as alluded to above, SocGen wonders if IP theft and “national security” tied to 5G are just peripheral (or secondary) issues.
“In our view, [Commerce’s action] is further evidence that export control in sensitive industries and trade imbalances between the US and China are two very different issues”, the bank says. “In fact, the prospect of China building a competitive semiconductor industry may well be the key worry”.
That’s food for thought, and I’d be willing to bet this is an issue that’s going to come up again and again over the next 12 or so months.