The trade war with China and its impact on the future of technology companies
The news of recent days is announcing a possible armistice in the US-China trade war. "Restrictive duties will not come into effect on December 15th as we have agreed on a deal. We will begin negotiations on the Second Phase of the Deal immediately, without waiting for the 2020 elections. This is a great deal for everyone. Thank you!" Donald Trump tweeted on Dec. 13, a couple of days before the previously announced duty increase on Chinese imports for another 160 billion dollars was to take place.
Experts estimate the level of concessions that both sides are ready to make differently, and the real readiness and desire of both sides to fulfill the economic confrontation. Few people believe in the end of the trade war in the near future. But even if their forecast comes true, the consequences of what has already happened will continue to affect the economies of the United States, China and other states, as well as individual companies, for a long time.
In this article, we will consider only one area that the trade wars have affected directly. We will try to find out how the events which have occurred earlier affected and will continue to affect technology companies.
Background
Many believe that Donald Trump, current president of the US, started the trade war against China. However, this is not exactly the case. Back in 2016, host former of the White House, Barack Obama, imposed “anti-dumping duties” against steel products from China among seven countries, including Brazil, India, South Korea, Japan, the United Kingdom and Russia. The amount of fees for different manufacturers differed. If for Brazilian manufacturers it was set at 39%, for South Korean - 6.9%, then for Chinese products - up to a fantastic 266%. This actually created a protective barrier for the rapidly developing Chinese metallurgy.
Donald Trump came to power playing on the protectionist sentiments of Americans. The abundance of Chinese goods was presented as the reason for the shortage of good workplaces within the states. As President of the White House, Trump launched an economic offence against China.
Initially (in April 2018), restrictive measures of the US in the form of a 25% customs duty were applied to 1.3 thousand Chinese goods (electronics, aviation parts, components for satellites, medical equipment, certain types of steel and medicines), the volume of import of which in the United States amounted to 50 billion dollars a year. Then Trump laid the blame on Beijing for the fact that the American foreign trade deficit in the commerce with China reached $ 500 billion. In response, China imposed trade duties in the amount of 25% on 106 commodity items (cars, aircraft, agricultural products and chemical products). The volume of their export from the United States to China also amounted to $50 billion.
From January 1, 2019, the United States began to threaten to impose protective duties in the amount of 25% on Chinese goods totaling $ 200 billion. The US-China negotiations that have begun forced Washington to postpone the introduction of the following duties several times. However, the Chinese leadership refused to sign the text of the trade agreement with the United States.
Trump decided to continue to put pressure on Beijing to force him to sign an agreement on terms that would be more advantageous for Washington. On May 8, 2019, the President of America blamed China for wrecking negotiations on a trade agreement and imposed protective duties on Chinese goods total of $ 200 billion.
In response to the higher import duties, China restricted US imports of aircraft, cars, mechanical equipment, and agricultural products, tightened anti-dumping procedures against US manufacturers, launched investigations into the activities of US firms operating in China, and increased the sale of US government bonds. This led to further disorganization of the chains of all world trade.
In August, the countries again failed to agree on the terms of the deal; instead, new mutual restrictions were introduced in September. In November, the US president announced his intention to strike the first part of the trade deal in the near future, but at the same time threatened China with a new increase in tariffs if negotiations failed. The restrictions were supposed to come into effect on December 15, but in the end it did not happen.
War and the high-tech sector
Technology companies in the US and China, to put it in clichés, have found themselves at the forefront of the economic confrontation between the two most powerful economies in the world. Undermining of the "technological sovereignty" has become one of the main goals of the Trump administration's protectionist policies.
To cut off access to American technologies, the US Department of Commerce in the spring of 2018 banned the Chinese telecommunications giant ZTE to purchase American products for seven years, citing violations of the agreement on sanctions.
The most powerful blow was dealt to Huawei, one of the world's largest makers of telecommunication equipment. In the summer of 2018, the Chinese company surpassed Apple in terms of sales of smartphones, taking 13.3% of the market, and became the second after the South Korean company Samsung with its share of 19.3%.
The company also demonstrated great success in the development of 5G technologies. In some countries it raised some concerns that thanks to Huawei technologies, China will gain access to fifth-generation mobile networks and expand its spying capabilities.
In August 2018, Trump banned the use of equipment made by Huawei and ZTE companies by U.S. government agencies, contractors, and agencies. Operators with significant amount of Chinese telecommunication equipment were banned from bidding for government contracts.
In December 2018, Canadian police detained Meng Wanzhou, the chief financial officer and daughter of Huawei founder, at the request of the United States. Following the news of the detention of the top manager of Huawei company, China's stock indices fell, especially in the sector of high-tech companies. The Shanghai Composite Index fell 1.28%, the Hong Kong's Hang Seng Index fell 2.5%, and the Nikkei 225 - on nearly 2%.
And early next year, federal authorities charged Huawei with a range of crimes, including industrial espionage, fraud, violating sanctions, and perverting the course of justice.
In May, the US president signed an executive order banning US companies from using telecommunication equipment produced by firms which would threaten national security.
The US Department of Commerce has added Huawei and its affiliates around the world to its Entity List due to the threat to national security, which severely reduced the company's abilities to purchase high-tech equipment from the United States. In fact, the Department of Commerce has banned Huawei from buying products that are either made in the US or contain more than 25% US-origin content without the knowledge of the US government.
Since then, American suppliers had to apply to the Bureau of Industry and Security (part of the Department of Commerce) for a license to supply any components of a Chinese company taking into consideration all US export-control regulations. Obtaining such permits is associated with the need to prove that the transfer of technological components cannot harm US national security. Moreover, being blacklisted actually prohibited the installation of Huawei equipment in the networks of American operators.
After that, Google suspended Huawei's access to its updated Android operating system, and chip makers such as Intel, Qualcomm, Xilinx and Broadcom announced the termination of cooperation with this Chinese company.
Whatever the reason for the strikes in the form of restrictive measures against Chinese technology companies, their American industry colleagues were also involved in the war.
So, the chipmaker Qualcomm, before the ban on ZTE sales in the previous year, offered chips for 65% of ZTE's 40.2 million smartphones. The price of one chip varied from 15 to 20 dollars. That is, refusal to cooperate only with ZTE even without taking into account possible countermeasures and changes in China's policy, can cost Qualcomm at least half a billion dollars.
There is no doubt that this situation with ZTE and Huawei will encourage other Chinese companies, especially Xiaomi, Oppo, Vivo, even under the not deteriorating conditions, to play it safe and look for other alternative suppliers outside the US and directly in China. Speaking about chips for smartphones, MediaTek system, which have been seriously progressing recently, can become such a real replacement.
American giants such as Apple, Tesla and others are still heavily depending on China. Their production facilities are located there, plus it is a huge market for product sales. For example, in 2017, before the active confrontation, the total amount of revenue of US companies in China exceeded $540 billion.
An increase in duties will mean an increase in the cost of production. In addition, American companies are likely to lose some consumers due to nationalist sentiments. Chinese social networks are increasingly reporting calls to boycott the US companies and goods.
Speaking about the prospects for goods from Chinese manufacturers not on the “black list” on the American and other markets, it is likely that they, but not American products, will replace niches of the “affected” companies.
So, the position of Huawei can be taken by another Chinese giant Xiaomi, which is capable of growing very seriously. In fact, under such a course of events, the risk of the company being suspected of “espionage” and also being on the “black list” increases.
Who is the winner?
We should admit that plans to use protectionist measures to force companies to return production to the United States did not materialize. Many corporations began to move supply chains from China to other countries: Vietnam, Mexico, India. This is already having a positive effect on their economy.
There also was a positive side effect of the trade war for countries not involved in the conflict. Unlike its direct participants.
The American-Chinese economic confrontation creates good conditions for companies from other countries and regions. Korea, Japan, and European countries are more likely to take advantage of it. And such countries as Vietnam, India, Mexico will be able to win, even without making special efforts of their own, but simply because the conflicting countries will continue to take supply chains outside the United States or China.