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U.S.-China Trade War Now Taking Prisoners?

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Monday, December 10, 2018

We start a new week of trading waking up to lower market closes across the Pacific, with Asian indexes like the Nikkei in Japan -2% and Hong Kong -1.2%. This came on the heels of big drops in Chinese imports and exports, which fell precipitously from the month of October to November.

Chinese exports had registered gains of 12.6% in October to just 5.4% last month. Imports saw an even steeper downturn: from 20.3% in October to 3% in November. Clearly, we’re seeing the initial effects of the U.S.-China trade war making their way to metrics in the world’s second-largest economy.

Overall growth in Chinese industries had been tapering down from high levels in recent years even without the added tariff aggravation; it’s now fairly obvious President Trump’s gambit to tax Chinese goods is having a detrimental effect, which no doubt is music to the ears of the president’s trade advisers Peter Navarro and Robert Lighthizer.

Add to this the strange twist from last week, when Chinese communications equipment major Huawei saw its CFO (and daughter of the company’s founder), Meng Wanzhou, arrested in Vancouver, Canada on fraud charges. The executive is being held responsible for allegedly having used a shell company called Skycom to get around U.S. sanctions on Iran. Meng may face extradition to the U.S. on these charges.

Considering the current tense environment between China and the U.S. these days, it stands to reason that this incident is not being exactly taken in stride. “China will take further action based on [these] U.S. actions.” It would appear Meng’s arrest is, at least in some camps, being taken personally by the Chinese government.

Just breaking this morning, we see China granting an injunction against Apple (AAPL - Free Report) on behalf of California-based Qualcomm (QCOM - Free Report) due to patent issues on Qualcomm’s intellectual property. The rub is that China is now banning the import and sale of nearly all iPhone models via this injunction. For its part, Apple challenges the models of iPhone this act should entail, calling Qualcomm’s efforts “desperate.”

That the biggest American company to ever do business in China is now being blocked from selling units in that country does appear tactical. Following proposed tariffs on U.S. soybeans and other huge exports to China that have already hit the bottom lines of farmers in the American heartland, now attacking iPhone sales looks to be another flank in the Chinese offensive.

To quote General Sherman, “War is hell.” Perhaps this includes trade war, as well. We remain hopeful there will be some resolve that makes good on the promises of the G-20 Summit earlier this month between the two factions; if not, we’ll likely be feeling more pain in the market through the end of calendar 2018 and beyond.

Mark Vickery
Senior Editor

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