US tech concerns with China could spook markets further

There is a saying that ‘a picture tells a thousand words’ – and in many cases this is very true. In early December there was a very telling photo of the G-20 summit in Buenos Aires which for me perhaps said it all. It was of a meeting between President Xi of China and President Trump of the US and both their trade delegations sitting looking at each across the table.

Trump had the disgruntled look of a petulant schoolboy, while one of his sidekicks - namely national security adviser John Bolton – looked like he was staring at ghosts. Maybe it’s part of a US trade team negotiating tactic! Most of the Chinese side appear largely to be straight-faced and much more difficult to read.

But then, low and behold, out of those discussions came the news that there was going to be a 90-day truce in the trade wars between the two superpowers. Who would have thought eh! Then just as everybody was thinking that trade hostilities might be improving slightly, Meng Wanzhou, the chief financial officer of Chinese telecoms giant Huawei, was detained in Canada on orders from the US apparently under allegations that Huawei violated US-imposed sanctions on Iran.

So, there you go, just when you thought it might have been safe to get excited about one step forward, the whole US-China relations scenario has obviously taken some 10 steps backward! At the same time, this trade power game now enters a new dimension – the US probe into the way some of China’s technology companies have operated in the past, and the way they continue to do so as part of their global ambitions. Many would say that it was only a matter of time before the US made a pointed move on the technology front with China.

With a lot at stake and in an issue which transcends way beyond a US-China conflict, it looks like we are heading into a much stormier 2019 than we might have initially thought. The US-China trade wars are already causing immense damage to the global economy and look likely to continue to spook markets further with these latest developments.

A quiet end to the year – no chance!

Traditionally December is a busy month, and this year it is no different. Many of you are busy trying to sign off deals before year end of course. And, please don’t forget to send your best deals of 2018 in to TXF as Deal of the Year submissions.

Yours truly, just back up from the TXF Southern Africa Conference in Cape Town, bounced straight in to the World trade Symposium, and thankfully yesterday I had some respite with the annual meeting of the London Trade Roundtable (LTR) where members gathered at the Bleeding Heart restaurant in the city of London to go through the agenda which was followed by a superb luncheon and some excellent wines. Astonishingly, this was the 30^th year anniversary of the roundtable – formerly known as the London Countertrade Roundtable, and yes, being an old hack I confess to being at the very first meeting all those years ago. Anyway, I digress, but will come back to the LTR at a later date.

Elsewhere in the world, it is interesting to see that yesterday organisers Afreximbank, in collaboration with the African Union, opened the first-ever Intra-African Trade Fair (IATF) to be held on the continent in Cairo. The organisers say that the overall event is s expected to attract about 70,000 visitors. In addition, transactions worth about $25 billion are expected to be concluded at the IATF which has around 1,100 registered exhibitors from 42 countries. In a good initiative, IATF can be seen to add meaning to the developments taking place with the African Continental Free Trade Agreement (AfCFTA) – a project mentioned in the Weekly last week.

But back to the major market developments over the past week or so, three major issues impacting, or potentially impacting global trade hang in the air for me – namely: developments in the trade wars scenario between the US and China, as already mentioned above; the latest reduction in oil production and its impact on the oil price; and of course, the increased focus on climate change and the need for increased sustainability as focused upon at the COP24 conference. As space is limited, I will focus here on the US-China trade wars and trade-tech issue.

The 90-day trade truce agreed in Buenos Aires between the US and China sees the planned 1 January US hike of tariffs to 25% from 10% on $200 billion of Chinese goods to the US delayed until 1 March. By all accounts this is a hard deadline – and US trade representative Robert Lighthizer has made it clear that the increased tariffs will go ahead if there is no real progress in trade talks. Since the G-20 talks have been taking place by phone between Chinese vice premier Liu He and US treasury secretary Steven Mnuchin with Lighthizer on the line as well.

China has said that some form of comprehensive agreement can be reached before March. So, what can China ‘give’ on this front in order to put the talks on a less aggressive footing? The US would certainly like to see China agreeing to purchase more US agri-produce, particularly soy and wheat, but also hogs and other products. However, reports from the US seem to indicate that farm groups have had no new contact on this front as yet.

The other major concession that China could bring to the table is agreement on a reduction in tariffs on certain imported US manufactured goods – in particular automobiles. Something ialready appears to be happening on this front. Whether it is or not, Trump banged out a tweet in early December stating: “China has agreed to reduce and remove tariffs on cars coming into China from the US. Currently the tariff is 40%.” Later reports from the US indicate that China has proposed reducing that tariff on autos from 40% to 15%. But this is unconfirmed. If this is being offered by Beijing, it will be a major concession and could break the deadlock.

In its analysis of the megatrends for 2019, global risk analyst company Control Risks cited ‘US-China trade rift foretells a new global order’ as one of the top five issues.

Control Risks stated: “The confrontation on trade between the United States and China will become the defining geopolitical dynamic of 2019. This antagonistic relationship will complicate life not only for businesses in China and the US. Companies in a wide orbit around this stand-off will feel the political and economic impact. In 2019, what started as a trade war will ultimately harden into a more permanent stance. A US ‘contain China’ policy could become one of the pillars of a new global order.”

And back to the issue of tech supremacy in all of this. In a recent article in the Financial Times, David Zweig, chair professor of social science at the Hong Kong University of Science and Technology wrote: “This is not a trade war. The fight over trade is merely a skirmish in a larger technology war, which itself is a component of a long struggle between a global hegemon – the US – seeking to maintain its dominance, and an ascending challenger – China – that feels it has a moral right to reclaim its status as a great power.”

In his article, Zweig points out that for many years China sought to appropriate Western technology through various means – and has had to live with accusations of cyber theft and encroachment of intellectual property. Many companies can point to their own experiences in this regard.

I recall back in the late 1990s talking to a high-ranking executive in a major Chinese telecoms company explaining to me how they had taken a range of mobile phones and extracted the best components/features to come up with the right type of handset for use in sub-Saharan Africa. Great idea! Western manufactures had been ploughing ahead with ever-better phone technology, but not paying attention to the needs and requirements for people in Africa for a genuinely affordable handset.

I also recall a few years ago now, at my local Geographical Association, listening to a talk from the export manager of a major UK equipment manufacturer who declared that his company had never had a commercial agreement with a Chinese company because of fear of technology theft. He did also say that his company had had many legal battles with certain Chinese companies who had allegedly tried to replicate copyrighted components.  

And it is also true that under Beijing’s Made in China 2025 strategy, state companies have been subsidised to purchase Western businesses and use their technology to gain advantages in production. But as Zweig also stated: “Removing China from global production networks of US companies will be nearly impossible. And forget about Chinese foreign investment in the US which has already dropped to almost zero.”

Today, the concept of China simply being a technology copycat of the West is completely outdated, and the West needs to change how it perceives Chinese companies. In many cases, China is way ahead of the West in technology. There is a lot to learn by both sides, and opportunities for mutually beneficial collaboration abound providing the safeguard of IP can be guaranteed. Let us hope that the US investigation into Huawei is not something that sends this whole debate back to the ‘cold war’ era.

 

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