US president Donald Trump has made Huawei the biggest story in tech right now by banning it from doing business with US companies. Huawei, China’s tech champion, has lost access to Google’s Android and Intel’s chips, and it’s even seen other international partners like ARM and Panasonic bowing to American influence and discontinuing trade. Having previously been on track to becoming the world’s biggest smartphone maker, Huawei is now in such dire straits that the best metaphor its founder could come up with to allay fears is that the company is like a plane with a hole in its side: not doing great, but still up in the air.
Bludgeoning Huawei with the ban hammer is, by Trump’s own admission, a negotiating tactic to focus China’s attention on American discontent with the existing trade relationship between the two countries. It lands atop a pile of punitive 25 percent tariffs he’s imposed on many Chinese imports to the US, and a promised further round of such tariffs on practically every Chinese export imaginable.
Two expert China observers tell The Verge that China very much cares about these restrictions on its most important overseas market, and it has every incentive to respond, whether to alleviate the sanctions or as a show of its own economic strength. But both agree that China has few, if any, good options available.
Veteran diplomat Hosuk Lee-Makiyama asks pointedly, “What does China have left to retaliate with?” It’s already imposed tariffs on the few classes of goods for which it wants to protect its internal market, and it’s excluded American internet giants like Google and Facebook, so what can China realistically threaten to do as a counter measure? Some observers, such as Ben Thompson in Stratechery, note that “China took the first shots” in the present trade war when it threw out many US tech firms, and it is now the US who is finally responding.
Lowy Institute’s Elliott Zaagman has spent the past 10 years living in and observing China, and he argues that the country’s economic prosperity is more brittle than it first appears. China’s “already at a point where growth rate is not an output, it’s an input,” meaning the government sets the goal it wants to hit each quarter and banks lend to hit that number. Beijing has done more monetary expansion, he says, than the US Fed, the Bank of Japan, and the EU combined. This has spawned a number of toxic asset bubbles — such as in housing, which has had trickle-down consequences of people taking on debt backed by overpriced real estate. Talking to him and Lee-Makiyama, you get the sense that China’s economy is closer to a pyramid scheme than a truly thriving and flourishing giant.
Retaliation is particularly risky because China’s economy relies on ever increasing trade with the world, as evidenced by the massive Belt and Road Initiative to develop land and sea routes for faster transport of goods. And Huawei, though a privately held entity, has been very helpful in procuring high-value overseas business with its lead in network infrastructure, 5G equipment, and, most recently, premium smartphones. Lee-Makiyama notes that because the country lacks a social safety net, it cannot afford to ever take its foot off the gas, which is what the Huawei setback inevitably represents.
Economists, he says, have long held 6.5 percent economic growth as the threshold below which China can’t dip if it’s to sustain its growing debt, and China reported 6.4 percent growth in the first quarter of 2019, before Trump’s harshest tariffs had taken effect.
It’s in this context that we must look at China’s apparently formidable arsenal of weapons it could deploy against the US.
There are also more sophisticated kinds of financial warfare. China holds a trillion dollars of US debt, which it could dump on global markets and thus trigger an interest rate spike for the US economy. The Washington Post’s Robert J. Samuelson explains the mechanics of this succinctly, however he argues that China would be doing almost as much harm to itself in the process. A slowdown in the US economy would lead to even less appetite for Chinese exports, the US dollar might also go down in value and make Chinese goods less appealing, and whatever US treasuries China is left with would also be worth less. This illustrates the inherent symbiosis between Chinese production and American consumption, which have together formed the backbone of the global economy over the past 20 years.
Source : Theverge
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