Following the crucial G20 summit meeting between President Donald Trump and President Xi Jinping, it was announced that the U.S. and China had agreed to a 90-day trade truce. As part of the pause on trade spats, Washington would postpone a planned 15% hike to tariffs on $200 billion worth of Chinese goods, while Beijing would reduce automobile tariffs and purchase more agricultural products. It appeared that good times were in store for the world’s two largest economies and both sides were on their way to achieving a landmark trade agreement.
Those dreams now appear to be an unrealized prophecy, like the aphorisms you would find in any fortune cookie.
The Trouble with Huawei
Meng Wanzhou, the chief financial officer of Chinese tech behemoth Huawei, was recently arrested in Canada at the request of the U.S. Justice Department. She now faces extradition to the U.S.
She is alleged to have committed fraud in 2013 when she informed American banks that an unofficial subsidiary, Skycom, did not have any affiliation to a Hong Kong business that reportedly had transactions with Iranian telecommunications companies. A partnership would have violated U.S. sanctions. Because U.S. financial institutions worked with Huawei between 2009 and 2014, the Iran sanctions were allegedly breached indirectly, which suggests Meng deceived and defrauded these outlets.
Ostensibly, the entire case against Meng relies on a PowerPoint presentation she delivered to a bank that was worried about Huawei’s relationship with Skycom. If it is determined that this was a fraudulent misrepresentation, then it would look bad for the daughter of Huawei’s billionaire founder.
Crown attorneys argue that she should not be granted $1 million bail over concerns that she would flee the country due to her “vast resources and connections.”
Huawei issued a statement on the high-profile arrest:
“The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng. The company believes the Canadian and US legal systems will ultimately reach a just conclusion. Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the U.N., U.S., and E.U.”
Once the news broke, the Chinese consulate in Toronto demanded that the U.S. and Canada “rectify wrongdoings” and free Meng. In the meantime, their government will “protect the legitimate rights and interests of Chinese citizens.”
Since any significant breakthrough is unlikely to happen at this point, Beijing might soon target American executives.
Will China Retaliate?
Reuters is reporting that security executives of several major U.S. companies held a closed-door meeting in Singapore. While discussing the arrest of Meng, there was one common fear: the inevitable backlash on American businesses operating in China. They are worried that Beijing will clamp down on U.S. firms and executives as retaliation for Meng’s detainment.
Facebook, Google, Walt Disney, and PayPal were represented at the local chapter of the U.S. Department of State’s Overseas Security Advisory Council (OSAC).
To circumvent potential problems, security executives are purportedly considering limiting non-essential China travel and holding all corporate meetings outside of the country. The companies declined to comment, but one Google spokesperson later confirmed that the contents of the meeting are being “misreported.”
Should China decide to go after American industry, the world’s second-largest economy could once again limit or slash its imports of U.S. goods, particularly the reeling agricultural sector which has seen dozens of bankrupted family-owned businesses.
Whatever retaliatory initiative China embarks upon, the uncertainty is hurting global financial markets.
Whatever retaliatory initiative China embarks upon, the uncertainty is hurting global financial markets. The Dow Jones wiped out all of 2018’s gains, plummeting 1,500 points in just a couple of trading sessions. If the presidential trade truce is abandoned over Meng, then equities could further bleed – when you factor in money-supply growth moderating and interest rates rising, millions of portfolios will endure a beating unseen since the economic collapse a decade ago.
The Fight Against Huawei
This fight against Huawei did not spring up overnight. Washington has placed the telecom juggernaut and its equipment under the microscope for years. The company has restricted operations in the U.S., officials have urged allies to be wary of it, and Silicon Valley startups have accused Huawei of stealing their intellectual property. It just so happens that the timing of the arrest comes as both sides engage in a bitter economic and geopolitical dispute. This is why nobody ever wins a trade war.