Breakdown of US-China Relations Will Leave the World Scrambling to Cope

After trade talks broke down, there seems to be no meeting ground, signaling a prelude to a wider fracture between the two countries.

The US and China are at the cusp of a major transformation of their relationship. While the US has signaled since 2017 that it sees Beijing as a strategic competitor, the moves that have unfolded in the past week could lead to a complete breakdown, with the rest of the world scrambling to cope with what could be fairly drastic consequences.

First, the trade talks broke down. Both sides put out their respective positions and there seems to be no meeting ground. Hopes are now being placed on the Xi-Trump meeting on the sidelines of the G-20 meeting in Japan at the end of June. But in the meantime, the US has moved to sanction Huawei, the world’s leading telecom company, an action that could be a prelude to a wider fracture between two of the world’s largest economies.

On May 5, on the eve of what was being billed as the final round of US-China trade negotiations, President Trump  announced  10-25% tariffs on $200 billion worth of goods because, he claimed, China had reneged on previous commitments. These tariffs had been in suspension in the wake of the Trump-Xi meeting on the sidelines of the G-20 in Argentina last year.

But when the talks took place on May 10, instead of declaring an end to the trade quarrel, the US said that the tariffs imposed on the eve of the negotiations would remain in place. Further, Trump ordered his officials to begin the process of raising the tariffs on everything else that had not been hit by previous levies, which could amount to some $300 billion worth of goods.

While departing, Chinese special envoy Liu He invited his American counterparts Lighthizer and treasury secretary Steve Mnuchin for another round of talks in Beijing, but White House economics adviser Larry Kudlow has said that, as of now, there were no plans for further discussions.

Subsequently on May 13, China too announced a hike in the tariffs on a revised list of $60 billion worth of US imports, with additional rates for products like LNG, soy oil, peanut oil, petrochemicals, frozen vegetables and cosmetics.

Dramatic escalation

This set the stage for a dramatic escalation in the standoff when, earlier this week, the Trump administration cracked down on Huawei. In an executive order on May 15, Trump said that in order to safeguard the Information and Communications Technology (ICT) supply chain and prevent “foreign adversaries” from exploiting American weaknesses or using US equipment to create such vulnerabilities, he was declaring a “national emergency.” As part of this, heads of various departments of the government were being empowered to determine who these foreign adversaries were and deal with the situation.

Promptly after this order, the Bureau of Industry and Security (BIS) announced that Huawei and its affiliates were being added to the Bureau’s Entities List. The sale or transfer of US technology to a company on this list requires a license, which could be denied if it were determined that it could “harm US national security or foreign policy interests”.

A similar ban, later revoked, on another Chinese company ZTE, brought it on the verge of collapse. Huawei is much bigger, is a technology leader in its field and is better prepared for the situation.

According to Reuters, a ban will also hit US suppliers. Out of the $70 billion the company spent on procurement in 2018, some $ 11 billion went to US firms like Qualcomm, Intel, Micron Technology. US companies were second only to Huawei’s domestic Chinese suppliers. The company has identified  92 core suppliers, 33 from the US, 25 from China itself, 11 from Japan and 10 from Taiwan, the others from countries like Germany, South Korea and Hong Kong.

Also Read: China’s Huawei and 70 Affiliates Placed on United States Trade Blacklist

As of now, we are not sure whether Huawei will be banned completely. The outcome of the trade negotiations and action against Huawei are interlinked. Moves against the company had actually been delayed as talks progressed through this year, but now, with the talks stalled, they were unrolled.

Reports say that Huawei has stockpiled enough chips and components to last out a year comfortably. This could presumably be seen as the time-frame for de-escalating the conflict. Should that not happen, the Chinese could act against US tech giants like Apple, Qualcomm and Broadcom who are vulnerable because of their dependence on the Chinese market. Greater China contributes 20% of Apple’s revenue and accounted for over 60% of Qualcomm’s sales last year and 17% for Broadcom. As in the case of the US, retaliation would also end up hurting the Chinese because its prominent smartphone makers like Xiaomi and Oppo depend on US chips.

Huawei logo at a bus stop in Mexico City, Mexico February 22, 2019. Credit: REUTERS/Daniel Becerril

Setting the stage for 2020 elections

The Trump administration’s actions are obviously popular in the US and could well be setting the stage for the 2020 elections. They are being followed by Bills being proposed by individual legislators promising even more drastic action. Trump ally and Senate Judiciary Committee chairman Lindsay Graham wants more stringent action to address the 5G threat, including the stoppage of business with countries which use Chinese technology. Senator Josh Hawley (R-Mo) is proposing an Act to bar large categories of technology to China, including AI, robotics, semiconductors and advanced construction equipment. Another Bill proposed by him and some other Republicans will bar visas for Chinese students from science or engineering schools linked to the PLA.

Also Read: Tensions Between US and China Ratchet up as Tariff Hikes Set to Take Effect

At first sight, a breakdown in relations between China and the US could be advantageous for India. It would strengthen the political alignment that is already shaping up between Washington and New Delhi. But whether a longer term disruption in the global economy would benefit India is questionable.

Trade experts say that there are opportunities for export for India in sectors like garments, agriculture, automobile, information and communications technology (ICT) and machinery. But barring garments, India lacks the scale to replace China in the global supply chains. Equally, India has opportunities in the Chinese market. Beijing has been slowly opening up its market to India as its troubles with the US have intensified.

Actually, in the longer run, everyone will be a loser. ASEAN countries which are touted as the best alternatives to some parts of the Chinese supply chain are also vulnerable to the fall in demand for parts and components that China imports for assembly into final products that are exported to the US.  Disrupted supply chains, greater protectionism, a decline in exports can all lead to a global economic slowdown which is obviously not good for anyone.

Manoj Joshi is a distinguished fellow, Observer Research Foundation, New Delhi.