Markets have been cheered by a somewhat more conciliatory tone over the last week or so from China’s President Xi Jinping and US President Donald Trump, reflecting a desire by the leadership of both countries to avert an escalating cycle of trade tariffs and counter tariffs through negotiations.
*** But Chinese officials believe the US Trade Representative is, indeed, likely to launch a new round of Section 301 investigations against China under the direction of the White House, targeting mainly the high-tech, especially Artificial Intelligence and cloud computing sectors. On the heels of measures against Chinese companies including Huawei and now ZTE, they are bracing for more salvos against China’s high-tech companies with business in America, including, potentially, corporate giants such as Alibaba and Baidu. ***
*** At a security meeting this week, China’s leadership discussed the potential for a fundamental, and strategic, clash with the Trump administration over technology, a clash they increasingly feel is looming. Those concerns, they believe, were confirmed, and if anything heightened, by the denial this Monday by the US Commerce Department of export privileges for China’s massive phone technology company, the Shenzhen based Zhongxing Telecommunications Equipment Corp (ZTE). ***
*** The ZTE decision led directly to the announcement yesterday by China’s Ministry of Commerce of a 179% tariff on imports of Sorghum from the United States. China’s MOC, pointedly, cited the rationale for that response as anti-dumping measures under WTO rules. That is, we believe, in effect intended to signal the possibility of additional countermeasures against subsidized sectors of the US agriculture markets. ***
Whether a “trade war” erupts from these tensions or not remains an open question, and it is of course in the interest of both countries to avoid such an outcome. But China’s leadership is bracing for continued tensions over high-tech that could make the second quarter of 2018 the worst period for China-US trade disputes this year.
The State Council’s goal now is to prepare for the worst, integrate resources, and take concrete and feasible measures to support the development of “core” technologies. On a more positive note, Beijing will seek to take preventive measures as soon as possible to avert US sanctions against China’s high-tech companies.
A Strategic – and Security – Threat
China’s President Xi Jinping presided over the first meeting of the 19th CPC (Communist Party of China) Central Committee National Security Commission on Tuesday of this week.
At that meeting – which happened to take place after the US action against ZTE – Xi stressed that the latest findings of the US Trade Representative’s Section 301 investigation posed a direct threat to China’s national security.
The leadership went on to characterize recent moves by the US administration as a “containment strategy” directly targeting China’s development of high-tech industries, and its “Made in China 2025” plan (see SGH 4/6/18, “US-China Trade: Playing with Fire”).
They noted the US National Defense Strategy and National Security Strategy reports which repeatedly characterized China as a strategic competitor and “revisionist power” that threatens the US. The message from the US, they believe, is clear, and it cuts right at Xi Jinping’s ambitions: the US should do whatever it takes to prevent China from surpassing the US, be it economically, militarily, or in technology.
A Wake-up Call on ZTE
In that light, the Chinese leadership has taken the ban on ZTE sales by the US Commerce Department extremely seriously.
The US sales ban, officials note, will not only cause ZTE to miss shipments and lose orders on handsets and transmission equipment. It will also seriously harm ZTE’s 5G and Artificial Intelligence development process. That ban comes just two weeks after ZTE succeeded in making a first phone call enabled by 5G technologies.
According to the State Council, Beijing’s aim is to make China among the first countries to issue 5G licenses in the second half of 2019. And beyond that, the goal has been to commercialize 5G by 2020, and to become the world’s largest 5G market by 2025 – all adding to China’s extreme sensitivity to these actions.