- Positive signals on the trade front despite tensions in other areas
- The ‘tech war’ moved to the next level – US tech could be caught in the crossfire
- More signs of economic weakening – it gets worse before it gets better
Both sides keen on making a trade deal
While the US-China ‘tech war’ has moved to the next level (see below), we keep getting positive signals on the trade front. This week China bought the first batch of soybeans from the US since the ceasefire deal. China has also agreed to cut car tariffs on US cars to 15% from the current 40% rate for three months starting on 1 January. It will likely be a permanent reduction if a trade deal is made. In addition, several media reported that China has agreed to make changes to its industrial policy ‘Made in China 2025’ strategy, which is China’s strategy to take the next leap in technology. According to some sources, China may delay some of the targets by a decade to 2035, see Bloomberg and WSJ.
In another sign that US President Donald Trump is keen on making a deal, Trump stated he could intervene in the case of the arrest of Huawei’s CFO: ‘If I think it’s good for what will be certainly the largest trade deal ever made, which is a very important thing…I would certainly intervene, if I thought it was necessary ‘. According to experts, this would actually be legal, although it would set a bad precedent, see New York Times. In a tweet Trump also said ‘Very productive conversations going on with China. Watch for some important announcements’. US Commerce Secretary Wilbur Ross also struck an optimistic tone in a Bloomberg interview mentioning that China had so far delivered in a range of areas since the ceasefire deal was made including measures to increase protection of intellectual property rights.
Comment. In our view, there are clear signs that both the US and China are keen to reach a trade deal this time and agree on keeping the trade track separate from other tracks that strain the relationship. Under normal circumstances, Trump would have used the Huawei case to put more pressure on China. Politico had an interesting story this week on Trump ‘s fear of recession in 2020 and the need for a trade deal. On China’s side, they have continued to deliver on points agreed upon in the ceasefire even after the Huawei case broke out. It suggests that they also very much want an end to the trade war. We continue to look for a trade deal between US and China within the next 3-6 months, see also US-China Trade – Ceasefire paves the way for the real deal in 2019, 2 December 2019.
Tech war to next level – US tech could be caught in the cross fire
While things look good on the trade front, the US-China relationship has moved to a new level when it comes to the ‘tech war’ and cy bersecurity . The arrest of Huawei’s CFO has sparked a very strong reaction in China, both from the leadership and the Chinese people. So far, China has mainly retaliated against Canada for arresting the CFO of Huawei (who got out on bail on Tuesday). Two Canadian citizens were arrested in China this week based on claims of threats to national security, see SCMP. The former US ambassador to China, Gary Locke, asked rhetorically in a Bloomberg interview‘ When have we prosecuted high-level executives of companies that have violated Iran sanctions?’ and called it a very delicate issue. Media reports suggest executives of US high-tech companies are now thinking twice about going to China, vice versa, see NYT.
The Trump administration is apparently preparing actions to condemn China over hacking and economic espionage, see Washington Post. Among other things, the Justice Department is expected to announce indictments of hackers suspected of working for Chinese intelligence service.
In a sign of how the US tech industry could be caught in the crossfire of the rising tensions on the tech and cybersecurity front, a Huawei supplier decided this week to punish employees that buy iPhones over next three years, SCMP. This week also Apple lost a case in a China court to Qualcomm, which resulted in a ban on selling a range of (older) iPhone models in China, see CNBC.
Comment. The tech war is here to stay as a long-term strategic rivalry has begun. The intensifying government-wide US approach to confront China was already signalled by Vice President Mike Pence in his speech at the Hudson Institute in October. We expect to see a range of measures from the US to follow up on that over the next year. From China’s side there are many ways in which they can retaliate on the tech front, for example by putting up regulatory and administrative obstacles for US tech companies in China, see Washington Post for examples.
More signs of Chinese slowdown – more stimulus coming
Economic data this week confirmed that Chinese growth is slowing further going into year-end. Export data were soft and industrial production and retail sales both disappointed (see top chart on this page). On the inflation front producer price inflat