The US-China trade war drags on, fueled as much by myopia and misperception as by actual trade issues. President Donald Trump’s favorite trade war whipping boy is Huawei, and the chasm between how Huawei is perceived in China versus how it is perceived in the U.S. narrowed in several unexpected revelations this week, all playing out in the press, the rodeo circuit of public perception.

American companies have been accusing Huawei of stealing intellectual property (IP) for decades. Those charges seem credible, but the most serious ones seem to be historical. The indictment the U.S. Justice Department announced last January concerns some Huawei shenanigans back in 2012 around a mobile handset test system designed by T-Mobile. Yes, that was wrong, but a 7-year-old incident over a smartphone tester is thin justification for a trade war that risks ending one of the longest economic expansions in U.S. history.

Some in the high-tech industry cheer the trade war as comeuppance for what they see as Huawei’s historical sins, but Trump barely mentions Huawei’s alleged IP theft. Rather, he is attacking Huawei based on a belief that Huawei 5G equipment installed in the cores of communications networks around the globe could be exploited by the Chinese government for espionage.

Huawei responded to this charge months ago: the company has no intention of spying, and if the U.S. thinks the Chinese government can use Huawei’s equipment to spy, prove it. The Trump Administration’s lack of response simply confirms for many Chinese their long-standing perception that the United States has never treated China fairly, and isn't treating Huawei fairly now.

A week crammed with developments

Chinese point to the U.S. Commerce Department's 2017 seizure of a large shipment of Huawei telco equipment, and the detention of Huawei executive Meng Wanzhou (by Canada, at the request of the U.S.) in 2018. Huawei filed a lawsuit against the U.S. for the return of its products; that situation got resolved just a few days ago when Commerce returned the equipment with no explanation and Huawei dropped its lawsuit. Meanwhile Wanzhou, who is the daughter of Huawei founder Ren Zhengfei, was charged by the U.S. Justice Department with financial fraud.

The problem for Trump is that Huawei’s challenge ("prove it") is completely reasonable — so much so that the only thing surprising about Microsoft president and chief legal officer Brad Smith agreeing with Huawei was how long it took for a prominent executive from the American high-tech industry to say so in public.

In an interview published on Sunday, Smith told Bloomberg Businessweek that Trump’s ban on selling to Huawei “shouldn’t be taken without a sound basis in fact, logic, and the rule of law.” Smith said the Trump Administration’s position has been, “‘Well, if you knew what we knew, you would agree with us.’ And our answer is, ‘Great, show us what you know so we can decide for ourselves. That’s the way this country works.’”

Brad Smith

Brad Smith (source: Microsoft)

Then on Tuesday, New York Times columnist Thomas Friedman wrote that he had met with reclusive Huawei founder Ren Zhengfei, and reported that Ren had made a startling offer: if the U.S. is concerned about potential security problems associated with Huawei equipment, then Hauwei would be open to licensing its technology to U.S.-based manufacturers.

Easier said than done. American companies couldn’t get rid of their phone network equipment operations fast enough, and it’s doubtful any U.S. manufacturer wants to participate in that market. But the offer is no small thing, if for no other reason than it forces Trump to take the next move. Thus far, the only move he's shown is slapping tariffs on Chinese goods, and there aren’t that many Chinese goods left untariffed. Maybe he can increase some 50 percent tariffs that no one is going to pay to 75 percent tariffs that no one is going to pay either.

His methods were unsound

This is Trump’s trade war. He’s been able to proceed with it because the goal of removing trade barriers and improving trade conditions between China and the U.S. is a necessity and has broad-based support. But the Trump Administration is The Gang That Couldn’t Tax Straight. Trump thinks China pays the tariffs he levies, and his advisors have apparently given up trying to tell him that his tariffs are coming out of American citizens’ pockets.

Furthermore, his specific demands for China appear muddled — to western analysts. If that’s the case, imagine how those demands are viewed by the Chinese. Some U.S. demands are not easily achievable for the U.S. For example, the Trump Administration is demanding that China buy more U.S. products, but U.S. producers of some of those products are already near or at production capacity, according to Citigroup analysts quoted by Business Insider.

That list of things that Trump demands China buy more of is long, but his rhetoric has focused on soybeans and semiconductors. Since he initiated the trade war more than a year ago, Chinese imports of US agricultural products have plummeted, and Trump is giving billions of tax dollars to U.S. farmers to temporarily buffer them from the decreased demand. If China can find other sources, it is unlikely to resume trade with U.S. producers. India, Russia, and other countries are all maneuvering to increase agricultural production for export to China. “Temporarily” risks becoming “permanently.”

China’s imports of U.S. computer chips have plummeted too, in part because Trump has essentially banned sales to Huawei, not only one of China’s largest electronics companies, but among the world’s largest. Trendforce said AMD, Broadcom, Nvidia and Qualcomm — four of the biggest IC design companies in the world — have decreasing revenues due to the trade war. Trump is not giving them any money to compensate them for their losses.

Meanwhile, global stock exchange trend lines look like rollercoaster tracks, twisting sharply up and down with each pronouncement from Beijing or D.C. That said, the exchanges are mostly going up. Investors seem to be ignoring the damage the trade war is doing. Or perhaps it’s just that they don’t care.

Remember, the stock market is not the economy. A number of recent economic analyses observe that the biggest engine of the US economy by a very, very large margin is consumer spending. As long as US consumers keep spending, this line of analysis goes, then it’s okay for the manufacturing sector to have a recession — as long as the ill effects are confined to the manufacturing sector. Unfair trade practices? Alleged IP theft? Deliberately upturning the entire semiconductor industry? The markets might not care how any of that gets resolved. Worse, they might not care if any of it gets resolved.

The industry's response, as such

Perhaps the manufacturing sector isn’t that important to the national economy, but on the other hand, this argument by analysts might be just a ploy to prop up consumer confidence — to encourage consumers to spend as long as possible as the manufacturing and ag sectors take a dive. Indicators that the world is heading into a recession are accumulating; pretending the trade war between the U.S. and China isn’t a big deal might be whistling past the graveyard.

Either way, it must be sobering for American technologists to hear a growing chorus of economic pundits dismissing their relevance to the US economy.

The high-tech industry has been trying to influence events. All along, somebody in the technology industry has been anonymously informing reporters at the major dailies that America’s most powerful high-tech executives have been privately lobbying the Trump Administration. These sources aren’t saying what the executives are lobbying for, but they want to assure investors and the public that the technology industry is actively doing something. They just don’t want you to know what it is.

If these execs are lobbying for continuing the trade war, then they’ve clearly got what they wanted — an ongoing trade war with no end in sight. It’s not clear why anyone would want to perpetuate the irresolution and the decline in revenues, but since tech executives refuse to comment publicly, it has to be considered a possibility. If they were lobbying privately for ending the trade war, they’ve been wasting their time. If high-tech CEOs want this trade war to be over, they gambled their company’s financial results on backroom discussions, and it was entirely predictable they were going to lose their bets. Trump and his supporters want nothing more than to win, and with his trade war he is telling everyone who can read a tweet that he’s winning.

Perhaps he is. It seems the majority of western pundits think that if Trump keeps squeezing China’s economy, eventually the Chinese will turn on Chinese President Xi Jinping and demand that China capitulate to American demands.

Not going to happen.

The Chinese think Trump’s being unfair to Huawei and to Xi and to China as a country, just as (they also believe) America has always been unfair to China. Xi can appear to be accommodating to the U.S. — has appeared to be accommodating – but Trump keeps capriciously levying tariffs, suspending them, and levying them again. The Communist Party doesn’t need to churn out propaganda; Trump is doing all their work for them. At this point, as far as the Chinese are concerned, Xi could become completely intractable, and the whole of China will blame the U.S. for any and all consequences. It is now not possible for Xi to lose the backing of Chinese citizens.

Chinese politicians take the long view, and everybody knows it’s possible to wait out Trump, whether he gets reelected or not. Furthermore, China recently cleared the way for Xi to remain in office as President for as long as he can hold the post. He is, in effect, a secular emperor. He can abide.

Reasons Offered for Pursuing a Trade War with China

Reason

 General view on subject

 Notes

The US trade deficit with China is too large

Irrelevant

 

Tariffs restore balance of trade (because China pays tariffs)

False

 

China is manipulating its currency

China ceased manipulating its currency in 2014

Trump was elected in 2016

China subsidizes production of steel, aluminum, other materials/goods

True.

While, subsidization around the world has been steadily decreasing, every major economic power still subsidizes at least a few things.

Encourage China to buy more US goods, including agricultural products.

This could have been accomplished without an overt trade war.

As trade war drags on, China is buying less from the U.S. and looking for other suppliers.

Chinese companies engage in IP theft.

Specific accusations of outright theft were once common. Recent accusations exist but are few.

China is developing more of its own IP and has been increasingly supportive of global IP protections.

China compels companies wishing to set up operations in China to share IP.

Irritating to western companies, but generally considered the cost of doing business in China

Largely unaddressed by the Trump Administration.

Chinese communications equipment represents a security threat

The charge, leveled primarily at Huawei, remains unproven.

Some other western governments find this a significant concern; others do not.

Chinese surveillance equipment represents a security threat

Surveillance has led to increased safety in some instances and political repression in others. In the latter instances, Chinese technology companies are frequently involved.

Brought up once by the Trump Admin, then dropped.