By Reshma Kapadia
Buckle up. The tit-for-tat between the U.S. and China is gearing up quickly, most recently with China's State Administration for Market Regulation on Monday opening an antitrust probe into chip giant Nvidia.
The probe, launched by the same agency that upended business models for internet giants Alibaba and Tencent Holdings a couple of years ago, sent Nvidia's stock lower Monday, an example of what could be ahead in the fraught U.S.-China relationship -- and the array of companies that could get caught in the middle.
Last week, China banned the exports of critical minerals including germanium and gallium used in military applications to the U.S. The Ministry of Finance also unveiled policies to prefer procurement from Chinese-made products -- another example of non-tariff pushback from Beijing. These moves hit the same week the Biden Administration issued a spate of restrictions on China's access to advanced chips used in artificial intelligence. They come amid a constant drumbeat from President-elect Donald Trump about his plans to levy 60% tariffs on Chinese imports. Trump is filling out his administration with China hawks, including Sen. Marco Rubio for Secretary of State and Peter Navarro as trade adviser.
U.S. stocks have largely tuned out the export restrictions and Trump's tariff threats for China and Mexico. Some investors view the tough talk to be a negotiating tactic, with indications of some early results. Canadian Prime Minister Justin Trudeau met with Trump to come up with plans for the border and Mexico's Claudia Sheinbaum announced a record fentanyl bust.
The situation with China is thornier, and veteran China and policy watchers caution against too much optimism. TS Lombard head of Asia research Rory Green views the Nvidia probe as a warning shot from China.
Green says that if restrictions increase on Nvidia sales to China and if China's chip ecosystem continues to rapidly improve, "then a tipping point will be reached when Beijing can use the threat of full assault on Nvidia as a bargaining chip. We are not there yet, but that is the direction of travel."
Analysts see other signs of concern that the trade battle could heat up quickly. They note the absence -- at least so far -- of former U.S. Trade Representatitive Robert Lighthizer, the architect of Trump's Phase One trade deal, from the administration.
Lighthizer had been expected to push for more tariffs by sticking to the enforcement mechanisms embedded in trade law and trade pacts. But Trump's current picks -- including Navarro, as well as Lighthizer deputy Jameison Greer as U.S. Trade Representative and Kevin Hassett to lead the National Economic Council -- could rip up the deal entirely. That could mean tariffs are imposed in the first days of the new administration, much earlier than the market is anticipating, says Veda Partners' Henrietta Treyz.
Investors may also be underestimating how Beijing could react. Attitudes in Beijing have hardened after the first trade war with the U.S. and as the Biden administration imposed new technology restrictions, says Rick Waters, managing director of Eurasia Group's China practice. Waters served as the top China policy official at the State Department for nearly three decades.
That makes Chinese officials less inclined than before to discuss the structural issues at the heart of the friction between the two economic superpowers, Waters says. Beijing, he adds, is more prepared this time around for friction and a period of decoupling that includes tariffs from the U.S. and China finding ways to defend itself.
Chinese officials have hinted at their defensive toolbox if the U.S. follows through with its tariff threat, including currency weakening and restrictions on critical minerals. China could also make life harder for U.S. companies, taking aim at defense contractors and those supplying them, and companies involved in due diligence around forced labor concerns in Xinjiang province. After meeting with government officials and academics last week in China, Matthews Asia Chief investment strategist Andy Rothman said officials there have "clearly articulated and coordinated signals" when it comes to the incoming Trump administration. "On one end, they are open to making deals, as can be seen with the prisoners exchange a couple of weeks ago, and at the same time they are signaling that if Trump isn't going to be in dealmaking mode when he takes office he needs to be aware the Chinese can respond and retaliate in ways that will inflict pain," Rothman says.
China and policy-watchers say the underlying risk of a full trade war is real. "They don't think [the threats] are just bluster," Waters says. "It will be a very different trade war if we end up with one."
Waters says that from China's perspective, the Trump administration announcing 60% tariffs implemented over a long horizon -- and primarily on strategic products, rather than low-end textiles -- could signal that the U.S. wants a deal.
Trump's cabinet picks, and consideration of Florida Gov. Ron DeSantis for Defense Secretary if another candidate is needed, could raise tensions.
"The combination of Rubio and DeSantis, plus Navarro and Hassett, is a heady one that covers both the military and economic branches of the U.S. focus on China," Treyz says. "Add in [Lighthizer protégé Jameison] Greer at USTR, who would like to both impose sanctions on China and provide additional domestic subsidization of emerging economic sectors, and we have an extremely protectionist and adversarial cabinet coming in to office next year."
If confirmation hearings on more hawkish cabinet picks veer into Beijing's hot-button issues, including Covid's origins, corruption of the Chinese Communist Party, or describing the human rights issues in Xinjiang as genocide, analysts expect China to further dig into its defense tool kit. Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 09, 2024 13:44 ET (18:44 GMT)
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