Tech's Cold War heats up.
President Donald Trump is preparing a series of efforts to limit China's ability to invest in the U.S. tech sector, multiple media reports have suggested, putting the sector front-and-center in the brewing trade war between Washington and Beijing.
The Wall Street Journal first reported Monday that the President will use the wide-reaching International Emergency Economic Powers Act of 1977 to invoke national security concerns to limit the ability of China-owed or China-backed firms to invest in U.S. companies that are linked to "industrially significant" U.S. technology. The reports also said that the U.S. Treasury and Commerce Departments, as well as the National Security Council, were drafting plans to introduce "enhanced" export controls, that could be unveiled as early as this week, to keep American technology from finding its way to China.
The reports followed a Sunday Tweet from the President that said the U.S. would reply with "more than reciprocity" to trade partners that impose what he called "artificial" barriers to American companies.
The United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than Reciprocity by the U.S.A. Trade must be fair and no longer a one way street!— Donald J. Trump (@realDonaldTrump) June 24, 2018
Action Alerts Plus holding Apple Inc. (AAPL) shares were marked 1.04% lower in pre-market trading Monday, indicating an opening bell price of $183.01 each, a move that would take its post G-7 Summit decline to around 5.75%. The S&P 500 Information Technology Index, a benchmark for the U.S. tech sector, has fallen 1.86% since the President signalled a tougher line on trade heading into the Quebec City gathering of leaders of the world's biggest economies.
China's insertion into the global tech supply chain isn't an accident, according to a study from the U.S.-China Economic and Security Review Commission published earlier this year, which urged a "national strategy for supply chain risk management of commercial supply chain vulnerabilities in U.S. federal information and communications technology, including procurement linked to China."
"The Chinese government considers the ICT sector a "strategic sector" in which it has invested significant state capital and influence on behalf of state-owned (information and communications technology enterprises)," the study, noting that seven major American tech companies -- Hewlett Packard (HP) , IBM (IBM) , Dell Inc (DELL) , Cisco Systems Inc. (CSCO) , Unisys Corp (UIS) , Microsoft Corp (MSFT) and Intel Inc (INTC) -- source more than half of their products and components from China.
U.S. tech companies, including Apple, which sold more iPhones in China than it has in the US for the past three years and generated 20% of its nearly $200 billion in annual revenues there, have important links to both mainland China and Taiwan. Foxconn, on the flipside, relies on its Apple contract -- the last of which was reportedly worth $7.5 billion -- for more than half its revenues.
Trump's apparent use of the tech sector, which remains a critical component of Beijing's "Made in China 2025" strategy of becoming a world leader in industries such as aerospace, clean-car production and advanced information technology, is not only a bold escalation of the brewing trade war between the world's two biggest economies, but also a major politicial risk heading into this fall's mid-term elections, given the sector's dominance of U.S. equity market performance.
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In fact, only last week, Terry Gou, the chairman of Apple assembler Foxconn and a key business ally to the President recently spearheaded the creation of a Foxconn assembly facility in Wisconsin that will create as many as 13,000 new jobs, said "the biggest challenge we're facing is the U.S.-China trade war (but) what they are fighting is not really a trade war, it's a tech war. A tech war is also a manufacturing war."
Gou's comments suggest companies in the global tech supply chain are starting to prepare for disruptions linked to the ongoing trade war rhetoric between Washington and Beijing, particularly with respect to U.S. accusations of intellectual property theft by Chinese companies and the recent clampdown on state-controlled ZTE Corp.
President Trump has vowed to impose fresh tariffs on $450 billion in China-made goods coming in to the U.S. if Beijing retaliates to an initial list of $50 billion in levies that kicks-in on July 6. China has said it will indeed hit back, and promised to use both "qualitative and quantitative" measures in response.
China imports around $130 billion of American-made goods each year, meaning any attempt to match Trump's new tariff plan would quickly run out of products to target, leaving Beijing with a broader option of changing industrial policy -- or even erecting higher barriers to entry -- in the world's second-largest economy.
Here's what BlackBerry's (BB) CEO John Chen thinks about a possible trade war.