In the past two weeks, the financial world has been thinking about the raging trade conflict between United States and China. This is after talks between the two countries ended, without any major outcome. In the aftermath, United States announced fresh $200 billion tariffs on Chinese goods while China imposed tariffs of more than $600 billion.
Perhaps, the biggest issue was the announcement that the US would put Huawei in a so-called Entity List. When a company is put on that list, it makes it nearly impossible for companies to sell products to it.
The action to ban Huawei has been condemned by most free market supporters. This is because the US has been unfair to a company that has done nothing wrong. In fact, the US is punishing the company for the failure of its companies like Cisco to dominate the industries it dominates. The biggest worry was the announcement by Google that it would stop supplying Android to the company.
Perhaps, the US wants to replicate what it did with ZTE. However, as the company’s founder said after the ban, Huawei is not ZTE. This is because of a number of things. First, Huawei has more money than most other Chinese companies. It deploys most of these funds to R&D. Second, Huawei has a diversified portfolio of products. In fact, the handset market is well-complemented by the telecommunications segment. This month, it won 37 of the 40 deployments of 5G in China. Third. While ZTE relies fully on external companies to provide products like chips, Huawei has developed its own chips. Fourth, the company is also developing its own operating system that could be popular in China and Europe. Finally, Huawei does very little business in the US.
What is bizzare about Trump’s Huawei ban is that it will do more to hurt American companies and weaken the trade deficit. This is because most of the companies that will be hurt by the ban are American companies like Qualcomm and Intel that export their products to Huawei. This will increase the trade deficit considering that the administration is considering a ban on five more companies.
Another big issue is that most American companies already have large manufacturing plants in China. These companies include the likes of Procter & Gamble and Nike. Trump argues that these companies are now leaving China for other countries. This will likely not happen because, it will be a costly thing to do. Their easier path will be to raise prices to compensate for the tariffs. In fact, Fed officials believe that the tariffs alone will cost American households more than $100 billion every year.
As American companies remain in China, they will likely face more challenges in the market they all want to be in. Already, there are reports of systematic delays of approvals for the companies in China. In addition, China could do other things to retaliate against the US. For example, it can ban cars from Tesla or iPhones. These actions could lead to significant declines and even bankruptcies of key American firms. For China, this would have no major impacts because there are few large Chinese companies doing business in the US.