By David Nelson, CFA
“We’re putting the trade war on hold.” The statement from Secretary of Treasury Steve Mnuchin over the weekend sent futures up sharply late Sunday. Markets seem to be rejoicing that tensions between the U.S. and China have eased and the prospect of tariffs on both sides has been diminished. Of course, the devil is in the details and a statement that broad demands context and clarification.
The U.S. was gearing up to launch as much as $150 Billion in tariffs on Chinese imports. Reports from both sides seem to indicate there would be an attempt to dramatically reduce the trade deficit with China agreeing to purchase significantly more U.S. goods. As a world leader in Agriculture and now Energy these two sectors of our economy seem poised to gain significantly from any agreement.
However, details are lacking and last week’s rumor that the Chinese were ready to close the gap by $200 billion seems just that, a rumor. Never the less, any progress at all is a hopeful sign and certainly light years ahead anything accomplished in the last 3 administrations.
Don’t trade away our future
While it appears there have been some concessions and we’re still early in the process, details relating to any progress on intellectual property and China’s role in the outright theft are lacking. As I said on Fox Business show Making Money hosted by Charles Payne late last week, intellectual property is the “whole enchilada” and a principal part of China’s 2025 Plan to bolster hi-tech industries at home. Why develop it internally when you can just steal it?
For decades China has forced U.S. corporations to partner with local firms to gain access to Chinese consumers. The forced handover of intellectual property became business as usual. President Xi counts on our fear of disrupting the status quo. It’s a strategy that’s worked successfully for decades. He understands U.S. lawmakers think in terms of an election cycle while they play the long game making plans for decades at a time. He understands he can out wait his American counterparts. Effectively his term never ends and will be in power for life.
I fully expect China to drag their feet when it comes to IP protection. It’s important for U.S. negotiators not to drop the ball and trade away our future in return for exports of soybeans and oil. It will look worse than the sale of Manhattan to Dutch settlers for $24 in trinkets and beads back in 1626.
ZTE and why it is so important
This brings us to the ZTE case and why it is so important. ZTE is of course one of China’s largest manufacturers of telecommunications equipment. The U.S. blockade where U.S. companies could no longer sell to ZTE brought the telecommunications giant to its knees. Some data suggests as much as 60% of the electronics in a ZTE phone come from U.S. based companies. ZTE became a target largely because they ignored sanctions against Iran. In addition, some intelligence officials suggest Chinese ZTE cellphones pose a national security risk.
It’s one thing to look the other way regarding the failure to abide by sanctions on Iran but if your own intelligence apparatus is signaling the equipment is a national security breach, then it’s an imperative these concerns are addressed.
In recent testimony and facing a confirmation vote to head the National Counterintelligence and Security Centers Bill Evanina said in response to a question asked by Senator Marco Rubio, that U.S. intelligence agencies are on record in assessing that Chinese telecommunication firms are used as a vehicle by the Chinese government to conduct espionage.
It doesn’t get any simpler than that.
