Checkpoint Asia

Trump’s Trade War Cease-Fire With China the Result of His Weakness

He's playing a weak hand — badly

Pulling back from the brink tells the Chinese he’s weak and he knows it

Does Donald Trump want to kill Huawei or not? After all, it was him who whined, moaned and bitched back in May that the Chinese company was a threat to the U.S. national security. As a result, the Chinese telecom giant was put on a trade blacklist – banning U.S. businesses from selling parts and components to Huawei. The sanctions were indeed a big deal.

It’s not every day that a U.S. president puts a foreign company on a Commerce Department “entity list’’, a privilege normally reserved for rogue regimes like North Korea. To include Huawei in the list means the company must be incredibly dangerous. After being blacklisted, Huawei admitted it would experience a 40% to 60% drop in international smartphone shipments. Trump was winning!

On Saturday, however, Donald Trump stunningly told the press that he had decided to allow U.S. companies to sell to Huawei, despite literally putting Huawei on the trade blacklist just a month earlier. Such a massive U-turn saw confusion and backlash from not only the business community, but also from lawmakers over national security concerns.

Investors aren’t really sure if the worst is over and they should pump money into the stock market. Lawmakers, both confused and angered, have accused Mr. Trump of selling out on national security. Should not the Chinese be isolated and crippled until the Middle Kingdom shows a change of behaviour? Obviously, Trump’s decision contradicted his argument about Huawei being a threat.

Mr Trump told reporters after the Osaka G-20 Summit that U.S. companies “can sell their equipment to Huawei” if there’s no great security problem attached. Such a vague and confusing statement provides proof that Huawei has never been a threat to homeland security in the first place, but merely a fake accusation to temporarily paralyse Huawei just because the U.S. is lagging in the 5G race.

So, either America was a sore loser who played dirty when they could not compete with the Chinese in 5G technology, or the Commander-in-Chief actually sucks at deal making. More importantly, President Trump appears to be backing off in the trade war, which will dramatically undercut the U.S. ability to change China’s unfair trade practices.

What did the U.S. get in return? Absolutely nothing. Well, Trump claims that China had committed to resume purchases of farm and other products from the U.S., but did not provide specifics. This indicates that American farmers are indeed the “Achilles Heel” of Donald Trump, at least until the 2020 U.S. Presidential Election is over.

Even though the latest ceasefire agreed at the summit is just a “temporary timeout”, Beijing happily heaves a sight of relief that Trump holds back new tariffs on a further US$350 billion in imports from China. Amusingly, the Chinese didn’t offer any formal statements in regards to the purchase of American agricultural products. And unlike previous ceasefire, this round has “no deadline”.

Conceding ground on Huawei was also a slap in the face to Secretary of State Mike Pompeo, who has warned U.S. allies around the world until foaming at the mouth that Huawei is “an extremely dangerous security threat” and encouraged – threatened even – them to blacklist the Chinese company. Australia, New Zealand and Japan now look like a fool for following Trump blindly.

But having tasted the bitter medicine of being blacklisted, Huawei has little time to rest on laurels. President Xi Jinping knew his “friend” cannot be trusted. There’s no telling if President Trump would flip-flop and stop American companies from selling components to Huawei – again – once he gets elected for the second term next year.

Ben Harburg, managing partner of MSA Capital, a Beijing-based venture capital firm, said – “Huge amounts of capital and talent are going to be thrown at building self-reliance and establishing a kind of parallel ecosystem here without dependence on U.S. chips, operating systems. The rationale is that this moment created demand. Previously, it didn’t have demand for those Chinese chips.”

There was a moment of desperation where there wasn’t any alternative to U.S. chips. Huawei, and China for that matter, hadn’t expected Trump would go to the extent of banning U.S. companies from doing business with the Chinese tech giant. Now the Chinese suddenly realize that the supply of U.S. chips can absolutely disappear overnight.

Yes, Trump should not have extended Huawei the lifeline it needed the most. Now that he did, China has started adapting to the changing business reality – forcing it to progress its own innovations. The U.S. president’s concession on Huawei would give the tech company time to develop and perfect its own chip capabilities and operating system.

The business landscape and relations between the U.S. and China will never be the same again. With no dependence on U.S. chips, American companies ultimately will lose out. Ultimately, China will buy very little from the U.S. as Chinese firms would source their components locally. They will sell them locally and emerging foreign markets, hence creating their own eco-system.

Hans-Paul Burkner, chairman of the Boston Consulting Group, predicted that the world will see a “significant movement” of production from China to other parts of the world by both Chinese and international companies. He also predicted the possibility of the birth of “two tech worlds”, if Chinese and U.S. tech firms end the existing eco-system of mutual supply and custom.

Howard Gold, a columnist for MarketWatch, has gone as far as concluded China has won the trade war. President Xi has calculated his American counterpart is unwilling to do anything that would threaten his support among key constituencies, like the American farmers. President Trump’s refusal to go to the extreme at Osaka Summit proves that he has lost the war. He blinked!

Trump is happy as long as the stock market cheers the temporary ceasefire, even pretends the worst of the trade war is over.

It was Trump, who spilled the beans when he said he made the decision to allow Huawei to buy U.S. products at the request of American “high tech companies”. So now China knows besides farmers, American tech companies can be used to push the president around.

Source: Finance Twitter