The administration of U.S. President, Donald Trump continues to cause confusion as to why it is blacklisting Huawei, China’s largest telecom company. The U.S. government has said that Huawei is a national security threat, put them on a blacklist and issued an order that bans American companies from supplying technologies to Huawei., but then given them 90-day exemptions from sanctions across four broad areas of business.
So what’s the story behind the U.S.’s conflicting positions and what is China going to do on both immediate and long-term basis?
In 2012, a House Intelligence Committee cited both Huawei and smartphone manufacturer ZTE, as potential security risks over close ties to the Chinese government. In a follow-up move, in 2013, the U.S. government then barred both companies from selling their product to any component of the U.S. Government.
In response Huawei accused the government of “inhibiting [its] business in the U.S. market” and said that “Huawei is trusted by governments and customers in 170 countries worldwide and poses no greater cybersecurity risk than any ICT vendor, sharing as we do common global supply chains and production capabilities.”
Huawei’s founder, Ren Zhengfei and other executives of the company repeatedly said that if the U.S. government, or any government in the world believed that Huawei was installing “back-door technology” that they should prove it publicly. Neither the U.S. or any of it allies have come forward with any proof
In it’s latest move, where the U.S. government has barred U.S. technology companies from dealing with Huawei, the Trump administration has been accused of again using the company as a chess piece in its trade war with China.
Many in China and the U.S. believe that the Trump administration has a dual strategy in its trade war that is fundamentally flawed.
First, the administration says it wants to lower the trade deficit with China but as one commentator noted, that, “In meeting after meeting President Trump is talking about clean coal and oil and bringing back manufacturing and says that Apple can manufacturer its phones for the same prices as in China, while Chinese President Xi is talking about AI, smart devices and cities and futuristic things.”
Hany Nada, of ACME Capital, which has multiple investments in Chinese technology companies, said on the TV program “Squawk Alley” that U.S. manufacturers would never be able to catch-up with Huawei based upon costs and that Huawei’s costs will always be lower than European or U.S. manufacturers.
Nada also said that China’s practices limiting U.S. technology companies’ activities in China are real, and “truly unfair” but that he wasn’t sure that trade talks could succeed “because negotiators on their side (China’s) are a lot smarter than negotiators on our side.”
Second, the Trump administration continues to say that Huawei is a national security risk because it “is technically capable” of installing back-doors into its equipment, a claim that can be made of any smartphone manufacturer or network equipment manufacturer.
But as Henry Blodget, Founder, CEO & Editor-in-Chief of Business Insider said, unless the U.S. can concretely prove its concerns that Huawei is installing backdoors to monitor people and companies around the world, then it doesn’t have a case. Blodget said “the administration has zero credibility, so when they say that Huawei is bad, it’s just President Trump trying to be tough.”
What most business leaders believe is that after China announced its goal in 2015 to raise the domestic content of core components and materials to 40% by 2020 and 70% by 2025 the U.S. and its allies were split into two groups ~ those who felt China’s ambitions were reasonable and could bring great benefits to both China and the U.S. and those who believe that everything possible should be done to slow China’s economic and technology advancements.
The Trump administration has taken the second view and the current focus of the U.S. is to uncouple U.S. and Chinese businesses and to create a bipolar technology "iron curtain," that divides the world between countries that rely on U.S. technology and those that rely on Chinese technology.
In order to boost its position about the threat from Huawei and other Chinese companies, the Trump administration held classified briefings with Silicon Valley technology companies and Venture Capital companies this week to warn them about the dangers of doing business with China.
Many people believe that the Trump administration is taking a “simplistic view” that it can pressure China to open its markets, allow U.S. companies to operate more freely than they have in the past, force China to limit its technology growth, and force it to buy U.S. products, with little or no retaliation from China.
Instead, business experts note that China has a variety of options regarding retaliation that include the following:
• Let the Chinese Yuan gradually slide by 25% which negates U.S. tariffs
• Increased tariffs on U.S. products ~ which China has announced it will do
• Increasing oversight on U.S. companies that operate in China and creating roadblocks for both market entry and operations
• Decreasing agriculture and other commodity imports from the U.S,
• Limiting China’s exports of rare earth materials to the U.S.
• Selling off the $1.3 trillion USD in U.S. treasury bonds that China owns
As a component of China’s future plans, President Xi Jinping has built a coalition through the belt and road initative and China’s foreign direct investments that will ensure that Huawei and other Chinese companies will have the ability to grow, even if they are denied access to the U.S. and countries that are aligned with it.
And with the pressure from the U.S. at its back, the Chinese government is telling its major technology companies to “speed up” the development of a variety of technologies so that China has less reliance on U.S. technology in the future.
The U.S. currently imports $560 billion USD from China, whereas China imports $180 billion USD from the U.S. The U.S. wants China to buy hi-cost aircraft and technologies from the U.S., even though it knows that China has a national goal to be less reliant on foreign products.
And beyond agriculture products like soybeans, it’s difficult to understand what China can buy from the U.S. Rather than taking a long-term approach to trade and cooperation, many economists believe that the Trump administrations efforts will backfire and that U.S. exports to China could decline by 30% by 2025 and by 50 ~ 60% by 2030.
Officials in the Trump administration also woke-up to the very public reality this week that China is going to take a “hardline” approach in its negotiations that the U.S. is not ready for, namely China's control of the global supply of rare earths that are used in consumer products like smartphones and electric cars and in military products including jet fighters and navy submarines.
President Xi Jinping visited Jiangxi Province this week and made a seemingly routine visit to a Chinese rare earths company this week and in remarks said that, "We should firmly grasp the strategic basis of technological innovation, master more key core technologies and seize the commanding eights of industry development.”
President Xi also said that, "Rare earth is not only an important strategic resource, but also a non-renewable resource” and his remarks are seen as an obvious threat that Beijing is standing ready for action.
According to Bloomberg, the U.S. currently imports 78% of the rare earth materials used in manufacturing from China and if the supply of rare earth materials is limited then U.S. companies and investments by U.S. companies would both be dramatically impacted.
U.S. dependency on Chinese rare earth materials – Image / Source – Bloomberg
Ryan Castilloux, the founding director of Adamas Intelligence, a strategic metals consultancy said that a ban on rare earth materials to the U.S. “would affect everything—autos, renewable energy, defense, and technology since China supplies about 80% of the rare-earth elements imported by the United States.”
The U.S. has relied on its dominance of the global financial systems to punish its adversaries by blocking them from carrying out transactions with U.S. banks, but its now waking up to a new reality that other countries, such as China, can also use “heavy handed tactics”, such as the threat of rare earth materials in its negotiations, and the is a prospect that the Trump administration has not evaluated.