China-US trade: Opening gambit

“The US-China trade conflict is like a book and we are just at the introduction. There will be a number of chapters and maybe additional volumes,” Lawrence Brainard, chief economist for emerging markets at TS Lombard, told the International Finance Corporation’s global private equity conference last week. “The US and China are going to be competing for a long time, whether we get a trade deal or not.”

Brainard suggested topics for the first two chapters in this hypothetical work. The first is decoupling, as Chinese President Xi Jinping recognizes it is naïve to depend on access to US markets – especially in areas such as technology – and takes steps to diversify his country’s supply chains. The second is re-globalization, characterized by the emergence of large trading blocs within Asia that are not necessarily integrated with other regions. Brainard described it as a movement from global markets to multi polarities. “Globalization as we have known it is dead,” he asserted.

The notion of decoupling has since taken on a new edge – albeit not at China’s instigation – as Huawei Technologies was hit with twin actions that could prevent it from selling products into the US market and complicate efforts to source components from American manufacturers. Google said that compliance with the directive, which has been suspended for three months, could see Huawei blocked from the Android operating system featured on nearly three-quarters of the world’s mobile phones.

Huawei, the world’s second-largest smart phone manufacturer, embodies numerous US concerns about China’s emergence as a global technology power and the alleged theft of intellectual property that has facilitated this rise. The company was identified as a threat to US national security – due to its claimed government ties – in 2012. Last December, Huawei’s CFO was detained in Canada pending extradition to the US to face charges of circumventing sanctions on Iran. Earlier this year, separate charges were filed against the company accusing it of trying to steal IP from T-Mobile.

The company appears to have been drawn into the wider trade dispute between the US and China, which may mean the restrictions are dropped in return for concessions in other areas. Last year, Huawei’s smaller rival ZTE Corporation saw its US ban commuted to a fine and stricter oversight after a matter of weeks. However, even if a resolution on the escalating tariffs is reached over the summer, decoupling will remain on the agenda and it is difficult to see how Huawei cannot be front and center. 

Interestingly, China-focused private equity investors speaking at the event last week were most perturbed by the short-term implications of the trade tensions. They have contributed to a deterioration in consumer confidence, uncertainty in public markets, and the postponement of several IPOs. The longer-term decoupling impact was interpreted as an opportunity more than anything else.

Chinese managers tend to have relatively little direct export exposure in their portfolios; they are primarily investing in the domestic consumption story. One GP noted that he was invested in a technology components manufacturer – and this company has already benefited from Huawei cancelling orders with overseas suppliers in favor of more predictable relationships with local partners.

Yes, there are countless uncertainties surrounding international technology transfers. Chinese VCs are said to have been shut out of the US start-up scene for fear their involvement might lead to commercial roadblocks. And tighter scrutiny of inbound investment effectively gives US regulators license to nix any China technology deal. Investors might be disquieted but they aren’t necessarily disheartened. One response to the prospect of China being excluded from US technology was that it would create more impetus for the country to push ahead with innovations and standards of its own.

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• Topics
• Greater China
• North America
• Regulation
• Technology
• China
• USA
• manufacturing