US President Donald Trump’s move to restrict US companies from doing business with China’s Huawei poses a real threat to the global economy, which is already showing signs of strain.

Last Friday, the US government blacklisted the Chinese phone maker and telecoms equipment provider on national security concerns but said the move was not linked to the ongoing trade dispute between the world’s two largest economies. Rather, the ban was aimed at preventing Beijing from using Chinese companies to spy on the US.

In a blow to both companies, Alphabet’s Google, which provides the Android operating system for mobile phones, was obliged to cut most of its ties with Huawei. This has serious implications for consumers outside of China, since Huawei is the world’s second-largest maker of smartphones, and for network operators that rely on the firm’s equipment.

Tech stocks, including Tencent-proxy Naspers, have slid on the news and on fears that the US-China trade tussle could escalate into a tech war.

The abrupt tech sell-off showed “how ugly things can become if both sides start to escalate conflicts”, local money manager Vestact told its clients.

And the decision to blacklist Huawei seems to have been hasty. On Monday, US authorities backpedaled slightly by granting the telecoms company a temporary 90-day licence to avoid disruptions for phone users and to broadband networks.

The company’s products are now so ubiquitous outside of China that pulling the plug immediately would have caused major problems for US consumers and businesses. But more concerning about the latest developments is that the Huawei ban further complicates the trade talks between the US and China, which had already taken a turn for the worse.

That has caused much stress in global markets and also risks serious harm to US companies, who are faced with the prospect of having to increase prices for local consumers or cut jobs in the face of tariffs. “America First” may harm the US the most.

The wisdom of getting into a potentially destructive dispute with one’s biggest creditor — China holds more than $1-trillion of US Treasuries – is not clear.

Should the Chinese decide to call on their loans to the US by selling the bonds, the implications for the latter’s interest rates and borrowing costs in the economy more broadly could be dire.

For China too, the consequences would be damaging, not least from the subsequent drop in value of its remaining holdings and the challenge of finding alternatives to the world’s biggest and most liquid bond market.

Even if Trump was acting on legitimate security concerns – in February, the Financial Times reported that British intelligence found the security risks from Huawei’s equipment could be mitigated – the move appears hostile and could derail trade negotiations.

The Chinese government “will not sit idly by” in the face of what it saw as “wrong behavior” by the US, Zhang Ming, China’s envoy to the EU, told Bloomberg this week.

An amicable solution to the trade dispute between China and the US is in almost everybody’s best interests. The Organisation for Economic Co-operation and Development (OECD) said this week that the dispute had led to an abrupt slowdown in global growth.

Growth in trade, which helps fuel the global economy, is expected to weaken further in 2019 to about 2.1%, the worst rate since the global financial crisis. The OECD said an escalation in the dispute could even shave 0.7 percentage point off the global economy by 2021, with global trade declining by 1.5%.

Investors, who may be in for a bumpy few weeks, will be hoping that Trump and Chinese President Xi Jinping find common ground when they meet at the Group of 20 summit in Japan in late June.

Pre-empting those talks, US companies have started speaking out.

As many as 173 footwear and related companies, including Nike and Adidas, wrote to Trump on Monday urging him to reconsider higher tariffs.

It’s without doubt that trade can and often does produce outcomes where all parties win. Trade wars rarely do that and the sooner Trump steps back from his strongman tactics, the better. (Business Day)

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