Trade War

Comments by several prominent economic thinkers who have spoken out in recent days regarding the impact of recent trade wars with China and the economy, are worth noting. At Bloomberg’s New Economy Forum held in Beijing, former U.S. Treasury Secretary Paulson said that a tech war was now also afoot and that a new economic iron curtain might descend on the world. He expressed concern about completely decoupling the world’s two largest economies. Even conservative Henry Kissinger said that the world is in the “foothills” of a new Cold War. To put a finer point on it, Jerry Yang who co-founder Yahoo said that if the world ends up bifurcated into rival technology spheres, referring the China/US fight over 5G and Huawei, it is at risk in tumbling back into the dark ages because business doesn’t have the capacity to handle that. But he isn’t sure how to re-establish trust in the context of the tit-for-tat trade war.

Some background on the tech war–in May, the U.S. added Huawei to what’s known as the entity list in an effort to block U.S. companies from selling components to China’s largest technology company, which it accuses of being a threat to America’s national security. Huawei is a major supplier of telecom equipment especially to smaller telecom providers around the U.S as well as a larger purchaser of U.S. telecom components. Huawei has denied those claims. The listing, which requires American firms to obtain a government license in order to sell to blacklisted entities, has hurt some U.S. companies’ earnings and caused confusion as to what their relationship with their Chinese customer will be going forward. The Trump administration’s curbs on the Chinese tech industry are part of its broader effort to contain Beijing’s rise as a strategic rival and economic superpower and have been part of the negotiations on a broader trade deal.

At a meeting in early October, President Donald Trump told his team that some Huawei licenses could be issued for non-sensitive items, but Commerce waited until now to move on the directive, an important signal for the Chinese that the Administration is willing to move towards them on at least a Phase One trade deal. The U.S. Commerce Department has started approving some suppliers’ applications for licenses to do business with China’s Huawei Technologies Co., partially reopening access to one of the biggest buyers of U.S. technology, but only to authorize limited and specific activities which do not pose a significant risk to the national security or foreign policy interests of the United States. Huawei and its affiliates will remain on the entity list. Perhaps in response, the Chinese President Xi Jinping told a delegation of business leaders on Friday that he wanted a deal, albeit one on a “basis of mutual respect and equality showing some optimism. But of course, right after that the President spoke out saying the Chinese want a deal, but he is not sure he wants one yet.

And finally, Janet Yellen, former leader of the Federal Reserve is concerned the US-China trade war may end the longest economic expansion in American history. The former Fed chief said there are “definitely downside risks” facing the US economy, including a “marked slowdown in global growth” and vast uncertainty sparked by trade tensions. Overall, the US economy is “still doing okay,” Yellen said, highlighting the unemployment rate which stands at just 3.6%, near a 50-year low. However, the manufacturing industry has been hit hard by the trade war and weak global growth. China’s economy grew during the third quarter at the slowest pace in almost 30 years, and Germany only narrowly avoided a recession. Yellen warned that those troubles could still infect the rest of the economy. “We could see spillovers from global weakness and trade into services and into the job market,” she said. Already, business spending in the United States has contracted for two quarters in a row, defying projections from the White House for an investment boom driven by the corporate tax cuts.

What investors do in the face of uncertainty is to put investment projects on hold. And that’s what we’re seeing in the United States and all around the world, Yellen said. “These tariffs are taxes on American consumers and businesses,” she said. “It’s making it more expensive and more difficult to do business and to control costs.” She identified three major problems if a downturn occurs:

  • the Federal Reserve has little room to lower interest rates because rates are already historically very low.
  • high federal budget deficits during a time of economic prosperity means that the United States will have less flexibility to mount a forceful fiscal rescue.
  • American businesses, encouraged by a decade of extremely low borrowing costs, has binged on large amounts of debt.

And then there is Hong Kong. This week, both the U.S. House of Representatives and U.S. Senate passed bipartisan legislation aimed at supporting the protests in Hong Kong, called the Hong Kong Human Rights and Democracy Act. The legislation requires the U.S. government to make an annual assessment about whether Hong Kong enjoys a sufficient degree of autonomy from the mainland to justify its special economic status, for example its protection from tariffs on Chinese goods. The President has said he will sign the legislation. Chinese Foreign Minister Wang Yi said the proposed legislation was U.S. interference in China’s internal affairs and that it had shaken trust between the two nations and has lodged official protests with the U.S. government. This could become yet another obstacle to a trade deal between the U.S. and China.

Not a very positive message for a near term trade deal, going into the holiday season.

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Denise Bode
Bio Link Denise co-leads the federal practice at Michael Best Strategies with expertise in association and coalition management as well as development of public policy strategies, at both the state and federal level. She was active, on behalf of firm clients, during the recent federal tax reform debate, much as she was during the last major tax reform in 1986. Expertise: Regulatory Law, Tax & Trade, Energy, Environmental, Food, Agriculture, and Telecommunications

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