Why ZTE Is The Last Stop Before a Full-Blown Trade War

President Trump can’t afford a trade war, but he also can’t concede to Chinese tech companies

Trump Tariffs Continue to Rattle Markets, But Investors Should Stay Calm

Source: Trump Gage Skidmore via Flickr (Modified)

Like almost anything under President Trump’s administration, nothing is ever clear or straightforward. Case in point is the latest back-and-forth involving ZTE, a multinational telecommunications company headquartered in Shenzhen, China.

Last month, President Trump made headlines when his administration announced a ban on U.S. exports to ZTE. Specifically, the Department of Commerce stated that the exports ban will be imposed for seven years. The infraction? ZTE defied international sanctions against Iran and North Korea.

You can easily read between the lines on this one. We’ve waged a war of words against North Korea, with the belligerent nation threatening to obliterate us. While we’re allegedly making progress towards peace in the Korean peninsula, the issue is still extremely volatile and unpredictable.

For ZTE to break North Korean sanctions was a slap in the face that could not go unpunished. Not only that, by responding harshly to ZTE, President Trump sent a powerful message to other Chinese tech companies: essentially, there’s a new sheriff in town.

Next, we have the Iran nuclear deal. Trump, while he was still “The Donald,” long criticized former President Obama’s alleged acquiescence to Iran. He threatened to nix the deal, and he recently did just that.

Again, Trump sent a strong message to ZTE and Chinese tech companies. Unlike previous administrations, this one is going to play hardball, all day, every day.

Recently, though, the hard-nosed Commander-in-Chief appears to be making rare concessions, or at least adopt a conciliatory attitude. Trump, through his favorite Twitter Inc (NYSE:TWTR) platform, stated that he’s working with Chinese President Xi Jinping, in working for some kind of solution to the ZTE ban.

Strangely, he mentioned his concern for Chinese job loss. What the heck is going on?

ZTE and Desperate Attempts to Avoid a Trade War

Primarily, both the U.S. and China are desperate to avoid a trade war. ZTE is essentially ground zero for the negotiating efforts. If nothing materializes, the Chinese have to respond, which translates into the trade war that nobody wants.

Unfortunately, it’s not as easy as two sides reaching an economic compromise. Since the start of this year, government officials and politicians have proposed ending business with Chinese tech companies like Huawei. Earlier this month, the Department of Defense demanded U.S. military bases to cease selling Huawei and ZTE phones.

Trump and many others have accused Chinese tech companies of stealing sensitive technologies and information. And with the globalized nature of our economy, multinational relationships could muddy the waters, facilitating potentially dangerous technology leaks.

Such fears represented the root of the President’s tariff on Chinese goods. And this was also the reason why Trump opposed Broadcom Inc’s (NASDAQ:AVGO) takeover bid for Qualcomm, Inc. (NASDAQ:QCOM). Fortunately, the tariff’s overall impact has been limited. However, should push come to shove with ZTE, a full-blown trade war is virtually guaranteed.

Trump absolutely cannot give an inch to China regarding intellectual-property theft; otherwise, his core base may abandon him come 2020. But he also can’t afford to escalate a trade war with China. Several American tech firms with a strong presence in China, including Intel Corporation (NASDAQ:INTC), Texas Instruments Incorporated (NASDAQ:TXN), Nvidia Corporation (NASDAQ:NVDA) and Micron Technology, Inc. (NASDAQ:MU) would face severe challenges.

Therefore, Trump’s sudden change of heart encouraged investors. But, just recently, the President apparently changed his tune again. He tweeted, in part, “Nothing has happened with ZTE except as it pertains to the larger trade deal.”

To emphasize the point, he concluded: “Our country has been losing hundreds of billions of dollars a year with China…”

A Defining Moment for Donald Trump

During the campaign, Trump bragged incessantly about his negotiating skills. He’s literally the world’s best negotiator and everyone knows it, or something to that effect.

Now, the world will see if the sizzle has any substance. The ordinary course of action is for the U.S. to concede on ZTE, while demanding similar concessions from the Chinese. Agriculture is one sector that risks severe impact in a trade war with China.

But this is no ordinary circumstance. The ZTE issue operates in the backdrop of the North Korean missile crisis. Trump needs China’s support in reigning in North Korea if we go the non-military route. I’m sure the Chinese know this, and they’ll play their own version of hardball.

The situation would be fascinating were it not so simultaneously terrifying. President Trump surrounds himself with some of the best in the business, so a solution is possible. But whether he listens is an entirely different matter.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/zte-last-stop-full-blown-trade-war/.

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