In a “significant escalation” of the trade war with China, the White House is considering restricting telecom equipment sales by some Chinese companies in the U.S., even as Chinese officials warn that “in the event of a trade war, China has a much greater ability to endure than the U.S.”
Beijing sent the first messaging salvo ahead of the Steven Mnuchin-led delegation to China (which will engage in trade talks over May 3-4) overnight when the PBOC fixed the yuan sharply lower than many expected. The signal was clear: push us hard enough, and we may just launch another devaluation. Or worse.
A little while later, Beijing did its best attempt at managing expectations, when it said that it’s “unrealistic” to expect to solve all issues between the U.S. and China at a single meeting, given the economic sizes of the two countries and their complex economic and trade relationship, foreign ministry spokeswoman Hua Chunying says at daily briefing.
While Hua tried his best to pay the diplomatic “good cop”, saying it was in the mutual interest of both countries to solve trade issues through consultation, just a few hours later, China’s foreign minister Wang Yi was the bad cop, who warned that whereas China would welcome a successful outcome from upcoming trade talks with the United States, it is “fully prepared for all outcomes and will not negotiate on core interests.”
Then the “worst cop” emerged in the form of yet another, unnamed official who according to Reuters said that talks must be held as equals and be mutually beneficial, echoing EU president Jean-Claude Juncker, saying that Beijing would not yield to any trade threats from Washington or accept any preconditions for talks.
He then uttered the most explicit warning yet: “In the event of a trade war, we have a much greater ability to endure (the consequences) than the U.S.,” the official said.
As a reminder, the United States has asked China to reduce its bilateral trade surplus by $100 billion and as reported last night, targeted Beijing’s “Made in China 2025” initiative, which aims to upgrade the domestic manufacturing base with more advanced products.
China – which last year had a record trade surplus of $375 billion with the United States – responded that Beijing would not accept talks with any preconditions.
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Then, just moments ago, the WSJ reported that in response to this latest escalation, the US is considering executive action that would restrict some Chinese companies’ ability to sell telecommunications equipment in the U.S., based on national-security concerns.
As the WSJ points out, this move “would represent a significant escalation of a growing feud between the U.S. and China over tech and telecommunications.” The affected firms likely would include Huawei Technologies Co. and ZTE Corp. , two of the world’s leading telecommunications equipment makers. They have found themselves increasingly in an international crossfire.
Pentagon officials said this week that they are moving to halt the sale of phones made by the two companies on U.S. military bases around the world. U.S. officials are concerned that Beijing could order manufacturers to hack into products they make to spy or disable communications. Huawei and ZTE have said that would never happen.
This latest salvo could come in the form of a Trump executive order, possibly in the next few weeks. One possibility under consideration has been curbing the ability of companies doing business with the U.S. government from using network equipment made by companies that could pose a national-security risk.
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While for now the escalating back-and-forth is nothing more than verbal foreplay, it will last at most three more weeks because the Treasury faces a May 21 deadline to report on restrictions on Chinese investment in the US, as part of the response to the recent Section 301 intellectual property investigation.
And, as Goldman writes this morning, enhanced investment restrictions have fairly broad support in Congress as well, raising the probability that restrictions will be implemented this year.
Goldman’s conclusion: don’t expect any good news until the 11th hour, and if anything, another batch of bad news may be next:
Unlike the NAFTA and steel issues, some additional market-disruptive policy moves regarding US-China trade seem likely. The most immediate focus will be the delegation of Administration officials set to meet with Chinese officials starting May 3 in Beijing. We believe a substantial breakthrough at this meeting is unlikely as the issues the US has raised—intellectual property policies, technology transfer, and the “Made in China 2025” strategy, in particular—are not the type of technical trade issues that can be resolved quickly.
For now, with neither China nor the US willing to back down and compromise, expect the war of words to escalate dramatically over the next 3 weeks as we reach the May 21 deadline.
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