Profiting From the Technology Cold War
A new term has been coined regarding Trump’s recent trade moves to block the U.S. from selling to Huawei. We are now in the “Tech Cold War,” as China and the U.S. start to exact tariffs, embargoes, and other more clandestine measures on each other.
This “Cold War” has been building up since almost a year ago when Huawei started to stockpile supplies in anticipation of a potential issue with Trump. It was always known that he was against some of their policies, and now that he is banning the sale of components to them, we have entered a more intense stage of the trade war.
Trump’s Likely Strategy
Ignoring the fact that this is likely a form of posturing rather than a long-term embargo on Chinese technology companies, businesses are going to be hurt on both sides. Trump’s goal here is to show strength and use that as a bargaining chip for negotiations. His power only extends to American companies, as well as the tariffs he can exact on Chinese companies.
All of this started last year when ZTE was forced to settle with the U.S. government after violating sanctions. In that moment, it became clear that Chinese tech giants were more vulnerable to intervention from the United States than was previously realized.
So at this point, we Trump has used almost all his chips and it becomes more of a waiting game. If his end goal is indeed to move towards freer trade with China and this is all part of a gambit to get them to bend to his will, then we can expect a high degree of volatility in the coming months.
China’s Current Position
The fact is, China is pretty far off from being technologically independent. It is years away from this level, which is why all Huawei was able to do was stockpile components. Knowing this, their leverage in this trade war seems to be more limited than we might originally have thought.
Apple doesn’t utilize Chinese components nearly as much as people think, and the United States, South Korea, Taiwan, and Japan are all big parts of the manufacturing process for the iPhone. Therefore, China doesn’t have as much leverage as outsiders might think.
The other side of this is that the U.S. is banning the export of their goods to China, which will hurt their profits. Having already incurred significantly research and development costs, this will make it harder for them to recoup their investment and will likely limit the amount they put into future innovation.
Perhaps this will splinter the economies and give Chinese companies a chance to catch up, but in the meantime, there will be lots of volatility to profit from in both economies.
Some Potential Bets
Where China does have an advantage is in rare earth metals. They produce approximately 90% of the world’s supply and if they were able to cut this off, companies operating outside China would be able to raise prices significantly. That makes them a great purchase in case China repeats its 2010 export quota.
This war started a long time ago when China started limiting the upside American technology companies could have in their country. By stifling Google, Facebook, and others in order to control the flow of information, they also hurt the economic upside of the companies. As much as China benefits from Apple’s presence in their country (millions of employees and the use of Apple products), they will likely be the first to be targeted. Apple would make a great target for a short over the next year, as they undergo strain to several points of their supply chain.
Finally, you could play the volatility index and bet on it increasing over the next few months until this “Trade Cold War” reaches a resolution. The U.S. currently has a hardware advantage on China that would take years to deplete. In that time, there will be numerous strategic skirmishes. This is merely the first one, but the three bets outlined above will likely continue to apply for a while.
Featured image courtesy of Shutterstock.
Gloss