Markets opened sharply lower Dec. 6 as the dumbest trade war ever escalated. Huawei chief financial officer Meng Wanzhou was arrested in Vancouver and the U.S. is seeking her extradition, reportedly on charges the country violated the U.S. trade restrictions with Iran.
Meng is the daughter of Huawei founder Ren Zhengfei. Ren, 74, is a former member of China’s military and Meng is a possible successor.
Huawei immediately lodged a protest and denied any wrongdoing, saying Meng’s human rights are being violated.
Unlike the arrest of JD.com (NASDAQ:JD) founder Richard Liu a few months ago, this is purely a financial case. It escalates trade tensions between the U.S. and China, which have become increasingly interdependent over the last 30 years.
The losers will mainly be Americans.
America Needs China
The fact is that American technology needs China more than Chinese tech needs the U.S.
Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and other U.S. tech companies all have their equipment assembled in China. China makes most of America’s chips, and is the key reason you can get an Android phone for under $100.
The trade has been reciprocal, because it’s U.S. software that powers these Chinese-made products, and U.S. marketing that makes a market for them. The Administration insists China’s trade surplus with the U.S. forces us to borrow from it, when in fact it’s that low cost of goods sold that lets U.S. companies sell gear around the world, giving U.S. software a higher platform on which to build.
Among Huawei suppliers in the U.S. that should see downgrades over Meng’s arrest are Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM) and Western Digital (NASDAQ:WDC), along with Singapore-based original equipment manufacturer Flex (NASDAQ:FLEX). The Nasdaq opened Dec. 6 down 1.9%.
The Trump Administration has been down on Chinese tech companies since they came into office, accusing China of stealing trade secrets, inserting spy chips into PCs bound for the U.S. and closing its market to a range of U.S. products and services, as the U.S. did during the 19th and early 20th centuries.
Worse, the present dispute isn’t even about China.
The U.S. has been trying to strangle Iran and change its regime, or at least force a reversal of its policies supporting uprisings in Syria and Yemen, and the Shiite-majority government in Iraq. But this is not Asia’s war, and many Asian countries have been looking for ways around the sanctions. Pro-trade groups like the Atlantic Council have been loudly calling on the U.S. to settle with China and there is hope that economic pressure, in the form of the current market turmoil, could yet force a reversal.
But having just gotten through midterm elections with minimal damage, the Administration would seem to have little incentive to compromise.
The Bottom Line
Even if the two sides come to an agreement, trust has been severely damaged, and the economic repercussions will be enormous.
The trade relationship with China is the most important economic relationship in the world, not just because of the volume of trade but because of the products and services dependent upon that trade.
Building chip plants and assembly plants outside China will be ferociously expensive for U.S. firms, while it could be relatively cheap for China to replicate U.S. software and marketing channels, and Huawei is already working on a replacement for Apple’s iOS or Google Android.
We’re stumbling into an unnecessary economic war and it’s going to cost you a lot of money.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN, MSFT and AAPL.