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Generational Dynamics Web Log for 16-Aug-2019
16-Aug-19 World View -- US-China trade war seriously disrupts world trade

Web Log - August, 2019

16-Aug-19 World View -- US-China trade war seriously disrupts world trade

Planning for the future in a chaotic world

by John J. Xenakis

This morning's key headlines from

US-China trade war seriously disrupts world trade

Does selling capacitors to Huawei violate Trump's China trade sanctions?
Does selling capacitors to Huawei violate Trump's China trade sanctions?

Much of international trade is in chaos, because of the US-China trade war, and especially because of US sanctions on Huawei Technologies and other Chinese firms for security reasons. Many international firms are going to take a revenue hits because they have to do less business with China. Furthermore, they're unable to plan effectively for the rest of 2019 and 2020 because President Donald Trump changes the details of the US sanctions rules frequently. Trump has announced two major changes in the last week alone -- delay of some tariffs, and ending all business with Huawei.

Trump has received a great deal of support both domestically and internationally for his US-China trade sanctions, because China has repeatedly lied cheated in trade as a matter of course for decades. Even Democratic party leader Chuck Shumer was counseling Trump to "hang tough." Those supporting the sanctions say, "this has to be done sometime, and if not now, then when?"

Returning to 'Normal'

However, almost everyone, particularly the Chinese, would like the sanctions to end, so that things can return to "normal." For the sanctions to end, there has to be a "trade deal," and so there have been frequent predictions of a trade deal in the mainstream media, many of which have proved to be wishful thinking.

The biggest example was the trade deal that was supposed to be signed at the end of May. During negotiations, the Chinese made commitments to resolve core complaints and write the changes into law -- theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation. But at the beginning of May, China reneged on every commitment, and demanded that the agreement be signed anyway.

This is a typical Chinese Communist Party (CCP) tactic -- agree to concessions, renege on concessions, and demand that everyone else honor their own commitments. This is the script that American presidents have followed in negotiations with China and North Korea for decades.

The CCP officials undoubtedly expected this to work again, believing that Trump would be politically forced to sign anyway, being forced to do so by Democrats in the US and by leftists internationally.

The CCP officials were apparently doubly shocked first because Trump didn't follow that script, and second because he received support from the Democrats and politicians worldwide. Trump vowed to raise tariffs on $200 billion worth of Chinese goods from 10% to 25%, and threatened to raise them even more if China reneged on its existing agreements.

As I've said many times in the past, North Korea will not give up it nuclear missiles, no matter what Trump does, and China will not give up stealing intellectual property and trade secrets, no matter what Trump does. Trump knows that too.

Since May, there has been no progress on US-China trade talks.

Peter Navarro is President Trump's Director of Trade and Manufacturing Policy. He's considered to be a "hardliner" on the China negotiations. He appeared on television this week, and recited a list of seven structural issues in China's economy that have to be resolved by trade negotiations:

These criminal activities are deeply embedded in China's culture, which considers Americans to be barbarians, and so it's doubtful that they could ever be resolved without a war.

Some reports indicate that the Chinese are hoping a new American president to take office in 2020, and be more "reasonable." The problem with that reasoning is that even a Democratic president would be unable politically to simply approve of the Chinese stealing intellectuarl property, forcing technology transfers, and so forth.

In other words, there is no compromise that resolves this problem. We can look to the North Korean talks for an analogy that we can learn from. In that case, the Trump negotiations with Kim Jong-un produced a "charm offensive" that postponed some North Korean tests, but Trump did not end the sanctions, and North Korea did not end development of nuclear weapons and ballistic missiles.

Results of sanctions on Huawei Electronics

The tariffs imposed by the Trump administration may have the effect of raising prices, but no apparent consequences beyond that. However, the sanctions on Huawei Technologies are having a major geopolitical effect.

Of course, it's not just America that's blocking Huawei. Officials in more and more countries are becoming convinced that Huawei is building undetectable backdoors into their routers and other devices. These backdoors could be activated by China's military using, for example, a secret 1024-bit key, giving the military control of the device.

The US and a number of other Western countries have placed severe restrictions on installations of Huawei 5G routers and other internet equipment on networks in their countries. As a result, many countries have restrictions on the purchase of Huawei equipment.

However, Trump's sanctions on Huawei have gone a lot farther, and these sanctions are creating a chaotic situation for companies trying to plan a strategy for the next year.

The problem is that China's government, through its Belt and Road Initiative (BRI), is forcing as many goverments as they can to install Huawei 5G networks. Since China's government is heavily subsidizing Huawei, Huawei's devices are being widely installed in any countries where they're permitted. This means that, in case of war, China's military will be in control of networks in those countries.

The Trump administration has placed additional restrictions on Huawei to slow down the company's rapid takeover of portions of the internet. The Trump administration is restricting sales of Huawei products to American companies for security reasons. But the Trump administration has gone further, and is also restricting sales of American-made products to Huawei. The objective is to disrupt Hunwei's supply chain, to slow their takeover of the internet as much as possible.

Components manufactured outside of the United States of course would not be affected by the US ban. However, it's more complicated than that, because components manufactured outside the US may still have components or materials manufactured within the US. The US has blocked Huawei from buying goods made from 25% or more of U.S.-originated technologies or materials.

Planning for the future in a chaotic world

An example of the confusion many companies are facing is Kyoto, Japan, based Murata Manufacturing. Murata supplies capacitors for Huawei-made base towers and smartphones.

The capacitors made by Murata are heavily used in electronic circuits to stabilize voltage and power flow. A smartphone may contain hundreds of capacitors, while an electric vehicle like a Tesla uses about 10,000.

It would seem that Murata's business with Huawei is completely outside the reach of the US sanctions on Huawei. That's why, on May 23, Murata's headquarters office in Kyoto, Japan, said that "its business had not been affected by the U.S. move."

However, this statement apparently caused something of a panic in the Murata's North American division. On May 30, Murata Electronics, North America (MENA), issued a very strong statement that contradicted the corporate statement issued just a week earlier. This statement said:

"Murata Electronics, North America (MENA), must not export, re-export or transfer (in country) any items (hardware, software, technology) that are subject to the US Export Administration Regulations to those who are listed in the Entity List. Public domain information available on Murata's web site is the only technical information available to these companies. Direct sales to any of these Huawei business entities or indirect sales known or suspected to be routed to the listed Huawei entities is to immediately cease.

Communications between, or on behalf of, MENA and Huawei, or any Huawei affiliated companies regardless if they are included in the Entity list or not should immediately cease. This direction includes communications such as meetings, email, phone, sample support, product promotion, technology discussions, quotes, or any other activity whether written or verbal.

Out of an abundance of caution, MENA is ceasing all sales and communications with Huawei business entities regardless of whether the Huawei business is on the Entity List or not.

MENA customer codes tied to Huawei affiliated companies will be deactivated."

This is a pretty aggressive policy statement, issued on May 30, in compliance with US requirements, on the part of the North American branch of Murata. It appears to a reaction to the corporate statement, to make it clear that MENA was complying with the sanctions, even if corporate might or might not.

Since then, Murata's Japanese offices have apparently not made any further public statements. Murata's June 30 quarterly financial statement made only a vague reference to the issue:

"In the global economic environment for the period under review, a slowdown in the economy in China caused by the trade friction with the U.S. was increasingly apparent. While employment growth continued in the U.S., economic prospects gradually worsened, and in Europe, political uncertainty coincided with the weakening of the region's economy. The prolonged U.S.-China trade friction is increasingly having an impact on the global economy, causing growing uncertainty about its future."

These are pretty clearly weasel words written by a lawyer, since they supposedly state a policy while saying nothing.

But one can sympathize with the complexity of Murata's problems. Murata has numerous plants, sales offices, and research facilities in China, so it's not surprising that the company is unable to arrive at a firm policy with respect to Huawei. According to research by Goldman Sachs, Murata will lose $90 million in operating profit because of the Huawei restrictions, and Japan's major electronic parts manufacturers together will lose $230 million in profits.

As another example, Osaka-based Panasonic Corp. has had similar confusion. On May 23, the company said that it was suspending supplies of some components to Huawei, but issued a clarifying statement on May 24 saying, "No transactions with Huawei have been suspended at the moment. We are still making checks whether the ban applies to our products."

Huawei reacted last year by preparing for a worst case scenario. Huawei is diversifying its suppliers, and it's developing some of its own components instead of depending on suppliers. Huawei told its suppliers last year that it wanted to build up a 6-12 month inventory of the most crucial components

The broader picture

Every company that does business with Huawei is likely to be confused right now, if only because President Trump himself seems to change policy regularly. On Friday of last week, Trump said that "it's easier not to do business at all with Huawei," and he added, "We're not going to do business with Huawei. That doesn't mean we won't agree to something if and when we make a trade deal, but we're not going to be doing business with Huawei."

Trump said that China was breaking its commitment to purchase more American farm goods, and indicated that if China started fulfilling that promise, then he would revisit the Huawei decision. For Murata, Panasonic, or any other firm that sells components to Huawei, this means that it must be ready to change policies at any time.

There's a broader picture here. In the 1980s, the US imposed sanctions on Poland and South Africa, and they apparently played a part in restoring democracy in both countries. I remember analysts at the time describing how sanctions were a much better way to solve problems than using military action. Today, many countries are imposing sanctions, including the US, the EU, the UK, Japan, South Korea, and others. It may be true that sanctions can solve problems, but only in a generational Awakening era. Today, in a generational Crisis era, they have the opposite effect. Instead of acceding to demands backed by sanctions, the targets impose counter-sanctions. There is now a large global network of interlocking sanctions involving many countries, and this is slowing growth and strengthening the hands of hardliners in many countries and falling growth forecasts.

This international trade war is in context of a number of things that are almost beyond belief in modern times:

There's a feeling these days that the world is headed for some kind of tipping point. In particular, there is a good chance of a global recession in the next few months, and that could trigger a chain reaction of crises in any of the items in the above list.

So the correct analogy to what's happening today is not Poland and South Africa in the 1980s.

One analogy is the Smoot-Hawley Tariff Act which was passed by Congress in 1930, during the Great Depression. It was particularly devastating to Japan, as it cut off Japan's exports to America of silk, its greatest cash crop. A year later, a desperate Japan invaded Manchuria.

Another analogy today is 1941. Japan invaded China in 1937, and launched the Sino-Japanese war. On August 1, 1941, US president Franklin Roosevelt showed his displeasure by establishing an embargo on oil and gasoline exports to Japan. Three months later, Japan attacked Pearl Harbor.

You don't have to understand these analogies to know that the world is an international pressure cooker today, a welter of tariffs, sanctions, annexations, genocide, ethnic cleansing, border disputes, and militarization. As I showed with numerous examples in my book, world wars don't begin with cataclysmic events like the bombing of Pearl Harbor. They begin with tiny conflicts that grow into cataclysmic events over a period of months.

Those interested in understanding the history of China, Japan, Korea and Russia should read my book, "World View: War Between China and Japan: Why America Must Be Prepared" (Generational Theory Book Series, Book 2) Paperback: 331 pages, with over 200 source references, $13.99


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