New front in trade war spooks stocks

Huawei showroom © Getty Images
Blacklisting Huawei may lead to a tech cold war

“Here be dragons,” says Christopher Beddor on Breakingviews. The White House’s move against Huawei, the world’s second-biggest smartphone maker, “takes the trade war into uncharted territory”. The US president has added Huawei to an export blacklist on national security grounds. The order prompted Google to ban the firm from accessing some features on its Android operating system. The move follows prolonged attempts by American officials to persuade allies, including Britain, to bar Huawei from involvement in their 5G networks and potentially stokes “a new tech cold war”. Stocks were unnerved at the thought. Domestic Chinese equities slipped by 4% in three days; America’s S&P 500 has lost 3% from its record high.

Huawei has doubled its global share of the smartphone market in the last two years, says Jim Armitage in the Evening Standard. The latest escalation could trigger a potentially “devastating crisis” for the maker of one in five of the world’s handsets. Google’s move to sever ties means new Huawei phones will not have access to security updates or features such as Google maps. That might give Trump more leverage with Beijing, but it also denies consumers access to China’s “cheaper, better technology”.

Why now?

Donald Trump removed steel and aluminium tariffs on Canada last week, while Germany and Japan were cheered when he granted a six-month delay before tariffs on imported cars and car parts take effect. It now appears that the White House was merely “scaling down conflicts in other areas” in order to focus on the confrontation with China, says Arthur Kroeber in a Gavekal Research note. Some say this is about gaining leverage in trade talks, but Washington already had plenty. China exports four times as many goods to the US as vice versa. The real reason is that many in Washington regard Huawei as a genuine security threat, says Kroeber. They had avoided action until now to avoid “torpedoing” a trade deal, but with prospects for an agreement “in ruins” they saw “an opening for an aggressive move”.

A black cloud over markets

Markets have yet to realise how rapidly the bilateral relationship between Washington and Beijing has deteriorated, says Zhiwei Zhang in a Deutsche Bank research note. President Xi Jinping last week condemned those intent on “remoulding or replacing other civilisations”. The American Congress is currently approving an act that encourages Taiwan to increase its defence spending. The trans-Pacific confrontation is “spreading beyond” tariffs.

This is likely to create pervasive uncertainty and volatility over the next few months, although central bank action may limit the downside for stocks. The prospect of the Fed coming to the rescue at the first sign of trouble has kept US markets buoyant, says Sarah Ponczek on Bloomberg. News of weak US retail sales actually triggered stockmarket gains last week. “Bad news is good again. As long as it doesn’t involve China.”