Markets

Godzilla versus King Kong

J Mulraj | Updated on August 10, 2019 Published on August 10, 2019

The US-China trade war, initiated by US President Donald Trump, looks like a fight between Godzilla and King Kong, two giants with the ability to hurt each other, and, simultaneously, trample on the rest of the world. International trade in goods and services account for over 50 per cent of global GDP.

Trump has used his economic muscle to bully others into accepting his stance. He has walked out of several international deals, including NAFTA, the JCPOA, the Paris accord on Climate Change and, more recently, the Intermediate-Range Nuclear Forces Treaty, which has helped reduce, for 31 years, the threat of nuclear war.

In Xi Jinping of China Trump met his match. Trump needs a trade deal with China which he can go to the 2020 US Presidential polls with, to get re-elected. Xi knows that, and, not needing to face the electorate himself, has all the time in the world to stall. Trump sought to arm-twist Xi by imposing a tariff on a further $300 billion of Chinese imports, and by labelling China a currency manipulator (without proof), which Xi retaliated by banning all US agricultural imports. Ouch!

This hurts US farmers, especially soyabean farmers, who depend a lot on the Chinese market. Chinese soyabean imports from the US has dropped from about 19 million tonnes in the first half of 2019 to around six million now. China is buying from Brazil; once the new supply chains are established, they tend to be sticky.

The trade and currency wars have led to a sharp fall in global stock markets. This, too, hurts Trump; a strong market, reflecting a strong economy, bolsters his chances of re-election. That is why he leaned on the Fed Chairman to lower interest rates.

China can hurt the US by banning the export to it of rare earth minerals, needed for military technology, storage batteries, DVDs, cell phones and for ushering in the 5G revolution. China’s reserves of rare earth minerals are 44 million tonnes whilst the US reserves are 1.4 million and it produces 90 per cent of the world’s rare earths.

5G technology lies at the heart of the coming Fourth Industrial Revolution, and the US wants to be in the forefront of this revolution in order to retain its economic hegemony.

The 4th industrial revolution encompasses things such as 5G telecommunication, which is 100 times faster than 4G. This speed is necessary to usher in the other components of the 4th industrial revolution, such as autonomous vehicles, Remote Surgery, Internet of Things, in which any device can be connected to another, which, on the factory floor, will enhance productivity and other things.

Huawei is leading its competitors in the technology race for 5G and is, as per a youtube video ‘Huawei Ban Explained’ ready for a rollout of 5G by 2020, whilst other countries would be ready 5 years later. This will fetch China the early mover advantage, and this is what Trump is desiring to fend off.

In the Godzilla versus King Kong trade war, China can hurt the US more when it comes to Huawei versus Apple. This is because 51 per cent of Huawei phones are sold domestically versus 17 per cent by Apple. A third of Apple’s iPhone sales are to China. So, a reciprocal ban hurts Apple more than it does Huawei.

Huawei has a technology lead because it employs 77,000 employees in R&D, or 40 per cent of its workforce and spent 15 per cent of its revenue on R&D. It has developed its own Operating System, to be free of Android, but which is compatible with Android.

China, a big market for civilian aircraft (it had ordered 100 Boeings for $10 billion) can also hurt US by switching to Airbus; China is probably the biggest market for Boeing.

China is also hurting in this trade war. It has according to as per an estimate, lost 2 million jobs due to the trade war. Its GDP is slowing down, and it has a huge NPA problem in its State owned banks.

The trade war affects global demand. Auto sales, e.g. have been hit and stock prices of automakers are down. Some 2 lac jobs in India’s auto sector have been affected and banks have decided to slow down lending to auto ancillaries.

In India, the big news last week was the scrapping of Article 370, and making J&K and Ladakh as Union Territories, administered by the Centre. This will lead, hopefully, to a fuller integration of the State with the rest of India, and by allowing others to buy property in J&K, hitherto banned, employment opportunities will be created.

This was followed up by a 35-basis-point cut by the RBI in its policy rate.

The worry of a continuing Godzilla versus King Kong fight will drive stock markets lower, and this would hit India’s stock market too. Caution is advisable.

The writer is India Head — Finance Asia/Haymarket. The views are personal.

Published on August 10, 2019
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