The G20 Summit in Osaka, Japan, is just a week away and the China trade war is center stage. Will President Trump deliver a tech surprise to Xi Jinping? If so, it probably won’t be wrapped in a pretty bow.
“I was in Hong Kong a few weeks ago, and a number of companies were raised as potential targets to be next from a U.S. technology-ban standpoint,” says Dan Tannebaum, the global sanctions leader and partner in the Financial Crimes Unit at PwC.
When asked how many companies might be a target of such a tech purchasing ban, as Huawei currently is, Tannenbaum said he knows of at least one. “I don’t know the merits of it,” he says. “If you look at who has been targeted thus far, they’re the largest in a particular field.”
The U.S. has gone after Huawei, the world’s largest telecommunications systems manufacturer and 5G leader, and ZTE, another Chinese telecom. ZTE was targeted for selling goods to Iran, whereas some of the items it sold had U.S. components in it, making them a target for Treasury fines. Huawei has come under the microscope mostly for matters of national security.
Tech fields that may be targeted with non-tariff barriers post-G20 include those in the semiconductor space and—perhaps—in biotech.
On June 17, Reuters reported that Senator Marco Rubio filed legislation against Huawei. Under the Rubio bill, companies on certain U.S. government watch lists, which would include Huawei, would not be allowed to sue U.S. companies with respect to patents in a U.S. court. Huawei is suing Verizon for $1 billion over patent licenses.
“I don’t think you can keep using national security as a reason to stick non-tariff barriers on China,” says Nicole Lamb-Hale, managing director at the business intelligence firm Kroll and a fellow at the Duff & Phelps Institute. Lamb-Hale is also a former ranking official in the Department of Commerce in the Obama administration.
“If you’re going to claim bans are required on national security issues for one company but not for others in a similar boat, then it starts to look an Aesop’s fable,” she says, citing the Boy Who Cried Wolf. “When it really is a national security matter requiring a ban, you might not be believed.”
The U.S. also used national security as an excuse to put higher tariffs on steel.
Trump said this week that he and Xi will indeed meet at the G20 and, more importantly, that their trade negotiators will be speaking again after more than a month hiatus.
An additional $300 billion in tariffs are still on China’s table. The market has largely priced this in, assuming the Federal Reserve will cut interest rates in July in an attempt to get ahead of an economic slowdown caused by tariffs on all Chinese imports.
Markets have been waiting for companies to transfer costs to end users, like consumers. So far that data point has not shown up in the inflation numbers.
However, everyone believes there will be a tipping point. We just haven’t hit it yet. Either companies renegotiate prices with their China suppliers, switch their supply outside of China where possible, live with reduced profit margins or raise prices. There are no other options.
“It is true that American consumers will bear the brunt of some of the tariffs, but I do not believe it is true that they will bear the brunt of all of the tariffs,” says PwCs trade policy leader Scott McCandless. “If that were true, then China wouldn’t care. They would probably sit back and laugh and say, ’Are tariffs what you want? You’re the ones that are paying for them.’ Instead, they are reacting by imposing retaliatory tariffs themselves. So I think that narrative out there that it’s solely the American consumer who will bear the brunt of this is not the complete picture,” he says.
President Xi may be playing a long-shot gambit of trying to isolate Trump by lining up G20 “free traders” against him in hopes they will consider China the true leader of globalization. And why not? The leaders of the World Economic Forum did that back in 2017.
Of the top five economies in the world, China is by far the most closed of them all.
Trump’s unilateral approach to trade also ticks off the Europeans. It is hard to imagine the Europeans choosing China over the U.S. There is widespread apprehension regarding Trump’s approach in Europe, too, but G20 leaders, namely Britain, have sided with Washington before on Huawei, for instance.
Tech sanctions aside, Trump could rather easily call out the humanitarian wing of European leadership, reminding them that they’d be siding with Communist authoritarians in Beijing, hardly a bastion of Western-style democracy.
Moreover, Europe is also in the crosshairs on trade. A blatant siding with China on trade probably puts a country on tariff notice at this point.
“Divide and conquer” is Trump’s game, says Brian McCarthy, chief strategist with Macrolens in Stamford, Connecticut. “Xi isn’t going to beat him at it,” he says.
As for Trump’s trade strategy, the politics of the tough approach on China are too compelling for him to make a surprising deal at the G20 on anything other than Chinese capitulation to Washington’s wish list.
What might that wish list look like? For starters, measurable progress on protecting intellectual property and changes to the tech transfer rules in joint venture deals.
“The way forward will be some sort of mechanism that can be agreed upon by the two countries, all focused on measurables in China,” says Dean Pinkert, a partner at Hughes Hubbard in their international trade practice.
Pinkert is a former Commissioner of the U.S. International Trade Commission, the body that decides on countervailing duties against foreign countries in anti-dumping cases. “There has to be some sort of agreed upon metric to see if China is measuring up to its commitments in intellectual property,” Pinkert says.
The best case out of G20 remains a commitment to keep talking.
But with that commitment comes the very real threat of stopping Huawei’s growth trajectory in China and elsewhere. And maybe give Huawei another Chinese tech company to commiserate with over Washington’s non-tariff barriers.