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USA vs Huawei, which could be the consequences?

May was a difficult month for the Chinese giant Huawei. The administration of Donald Trump placed the company on the blacklist to do business, forbidding any kind of commercial relationship with the United States without first having a special permit from the Department of Commerce. Derived from alleged “backdoors” in their devices that allowed the Chinese regime to spy on US citizens.

Huawei sanctions are not new, they began in January when the government of President Trump filed a lawsuit against the Chinese company, stating that it had conspired to steal intellectual property to the operator T-Mobile. Derived from these recent actions, Google made the decision to break relations with Huawei so it will immediately lose access to updates to the Android operating system, including access to the Play Store (its app store), Gmail and other functions, in the next Huawei smartphones.

This prohibition delays and jeopardizes the supply chain for the implementation of 5G services in the world, but future sales of the company are the most dangerous. Huawei, nevertheless, communicated that they have a “plan B” which consists of that they have increased for months the inventories of the necessary components to continue arming their equipment and for the development of their own operating system. Kirin, as it is known until that new operating system, will be released later this year or early 2020.

However, the company’s plan B does not seem to calm telephony service providers. Vodafone and EE, two of the largest operators in the United Kingdom, have decided to temporarily suspend orders for mobile phones with 5G technology to the Chinese manufacturer. For its part, Softbank and KDDI, the largest operators in Japan, have opted for the same maneuver. To make matters worse, the SD Association expelled Huawei, so the Chinese company will no longer have access to the use of microSD cards, technology that make use of most of their smartphones.

Huawei, inside China, enjoys great popularity since it is living a different reality from the West. For example, searches are done through Baidu, the Youtube alternative is called Toktok, and the most popular chat application is Wechat. Undoubtedly, Huawei is in a critical position where it seems that China is being confined, the future of this great Chinese company will depend on its trade negotiations with the rest of the world, but – mainly – with the United States. The world must consider that the supply chains nowadays are global and the fall of one of the most important companies in technological innovation can affect other international companies.

Or, in the effort to try to block China’s technological advance through this company, it could have the opposite effect and cause it to accelerate the development of technologies that compete with those Americans that currently dominate the market. Thus, we could see in the short-term progress in the development of Huawei devices that allow them not only to be self-sufficient, but to be a real alternative to Western technology.

ITALY JOINS CHINA, AGAINST THE EUROPEAN UNION?

The One Belt initiative, One Road (OBOR) is controversial as many political analysts consider it a tool of the Chinese government to dominate economically less developed countries. These analysts believe that the discourse in favor of economic integration is just an argument to continue pushing its geopolitical influence.
Under this thinking, Western governments have shown reluctance to participate in China’s integration project. The government of the United States considers that OBOR is a threat to its national security, since it will serve to expand its espionage technology. The governments of Europe, for their part, have legislated to limit the entry of Chinese capital into “strategic sectors,” such as defense and telecommunications. However, Italy agreed to join the Chinese initiative on March 23.
Italian Prime Minister Giuseppe Conte signed a memorandum with Xi Jinping to join Italy in the infrastructure investment plan, an agreement that presents a risk to the sectors that the European Union has tried to protect. With this agreement, one of the founders of the European Economic Community joins the Beijing investment project.
It is important to mention that the governing coalition in Italy is anti-European in nature, a sign of skepticism about the European Union’s ability to provide a framework that alleviates economic problems in Italy. The Italian government intends to make its bilateral trade flourish with China both to alleviate its trade deficit and to create a complementary (or substitute) capital inflow channel for Europe, which has been showing signs of slowing for several years.
The commercial benefits for China are still uncertain. But the political benefits are remarkable. The memorandum increases the incentive for Eurosceptic countries to continue their distance from the European Union. In addition, faced with the militarization of China, several countries will want to cooperate with it instead of fighting its aspirations.
The memorandum is an agreement between heads of state, so investment projects are not official. However, it is evidence of China’s ability to push its economic expansion agenda over economic and military alliances, which could present a risk to the current geopolitical balance.

Are you interested in learning more about the realignment of powers in the international concert? Write to info@riesgospoliticos.com.mx.

 

 

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THE WAR THAT COMES WITH TECHNOLOGICAL LEADERSHIP

According to experts in the field, China and the United States are in a competition to lead the world of technology, which has caused tensions between the two countries. On December 1, 2018, Meng Wanzhou, Huawei’s financial director and daughter of the founder of Huawei, was arrested in Vancouver, Canada for alleged violation of US sanctions against Iran.
Huawei, is the most important Chinese company in the manufacture of components for the development of fifth generation or 5G mobile networks. It is expected that this technology (5G) creates a new ecosystem of the Internet of Things, satisfying the communication needs of billions of devices connected to the network. We have found reasons to think that Iran is simply a pretext for the United States to stop the development of this technological giant. It must be taken into account that EE. UU has used commercial and financial penalties for political purposes.
This shows that China’s technological aspirations have raised concerns in the United States. UU In this regard, President Donald Trump has said that the trade war with China will protect US dominance and curb Beijing’s plans to achieve economic and technological supremacy – according to the New York Times.
On the other hand, in 2015, China approved a strategic plan known as “Made in China 2025”, an initiative that seeks the development of ten key sectors of high technology to modernize its manufacturing base, for example, in aeronautics and robotic. One of the main objectives is that, by 2025, Beijing will be 70% self-sufficient in these high-tech sectors. Added to this, Jun Canrong, associate dean of the International Study School of Renmin University in Beijing, said that “Even if the US it tries to block China’s development, it will not succeed, since China’s huge domestic market alone is enough to drive a mature industry of AI (Artificial Intelligence). ”
“Made in China 2025” has already given something to talk about. In the midst of the aeronautical crisis generated by the plane crashes of the Boeing 737 Max, which forced them to remain on land and contemplate the possible cancellation of more than 5,000 units, China announced to international markets the arrival of a plane that will compete with it. , the C919 of the COMAC company, which has a capacity between 168 and 190 passengers. This aircraft will represent an alternative to Boeing aircraft and a new competitor in the aeronautical market dominated by Airbus and Boeing.
So far, 815 COMAC C919 units have been requested. Those who have shown interest in this aircraft are, mainly, local companies and small companies from countries with great dependence on China. The COMAC C919 costs almost half the price of its competitors, but still needs to improve its energy efficiency, which puts it at a slight disadvantage.
It is worth mentioning that China is the main Boeing market, with 25% of the aircraft of this US company. Boeing even has a manufacturing plant in China, and has strategic alliances with Chinese companies that supply their components. Thus, a new Chinese competitor in the sector can bring as a consequence readjustments in the Asian aeronautical market. Boeing will be forced to adapt to these changes. However, derived from the crisis generated by the accidents of two 737 Max, Boeing is in a very delicate situation to commit to the development of new aircraft.
This situation benefits China to impose reciprocal measures against the United States for the Huawei case. China was the first country to order its airlines to suspend flights of the Boeing 737 Max aircraft. In addition, negotiations are currently underway to reach a trade agreement between China and the United States. One of the points in discussion is the export of Boeing 737 Max aircraft to the Asian country. Thus, it remains in China, given the crisis caused by these planes, how to continue with the talks, and what position to take to be benefited.
Without a doubt, China has given much to talk about. On the one hand, the Huawei case exposes the concerns of the US government. UU for the Chinese rise in technology, which could take away their leadership. On the other hand, China has been clear in its intentions to lead the world technology sector and the arrival of COMAC C919 brings it closer to its goal.

Do you know how this battle for technological leadership can impact your business? Write to info@riesgospoliticos.com.mx to provide you with the advice you need.

 

 

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SEA OF SOUTH CHINA, A DANGER FOR WORLD TRADE

Currently, maritime trade is regulated by the United Nations Convention on the Law of the Sea (UNCLOS). This regime was established after the First World War under the premise that taxes and blockages to free trade interfere with world peace.

This means that, except for a certain number of nautical miles that gives countries exclusive economic rights over their seas, the seas are international waters in which no State exercises sovereignty. This regime promotes cooperation between governments to protect merchant ships and guarantees the right of way. If there is less uncertainty, the risks are lower, which encourages the creation of more exchange networks and cheapens international trade.

However, since 1947, China has declared that it has right over waters in the “Line of the nine points”. This line demarcates most of the South China Sea, a sea in which the exclusive economic zones of six countries adjoin and through which approximately one third of international trade flows, valued at 3.4 billion dollars annually, according to a study of the Center for Strategic and International Studies.

The Chinese government argues that it has the historical right over these waters. This means that, if it manages to impose its own regime above the UNCLOS, it could impose taxes on merchant ships. In this sense, it is known that China is building artificial islands with military infrastructure in the South China Sea.

China’s claims present a risk because, if implemented, they constitute a precedent for other coastal countries that are highly dependent on trade to seek to increase their profits by imposing controls on the passage of ships in strategic ports or ports. This in turn entails the risk of militarization since, in the absence of a shared protection regime, each country and each transport company must ensure the protection of their vessels.

These are global risks, but there are also risks that affect companies in the short term. An example is the risk of raising transport costs. The main reason why trade in the South China Sea transits is because it has natural narrows that facilitate intercontinental trade. The busiest is the Strait of Malacca, since it is the fastest route to connect the Pacific and Indian oceans. This strait is the most economical route to move goods between Asia, India, Africa and the Arabian Peninsula. If a military or political event forced merchant ships to look for new routes, transport costs and piracy risks would increase considerably.

It is estimated that taking the second cheapest route (through the Sunda Strait) would raise transportation costs by approximately 65 million dollars, which would represent huge losses for companies that trade via this route. Any eventuality that forces ships to encircle Indonesia or even Australia would raise costs even more. In addition, these disruptions to trade in the short term can translate into uncertainty for financial markets in the medium and long term.

There is evidence that, since 2015, China is interested in maintaining a military presence in the South China Sea. And, in 2016, an international arbitration between China and the Philippines determined, under UNCLOS, that China’s historical claim has no basis in international law. These two contrasting cases show that the tension in the region is rising and there seems to be no middle ground between China’s historical claims and the prevailing trade regime.

 

Do you need advice on the possible effects on world trade and how would it impact the business objectives of your company? Write to info@riesgospoliticos.com.mx to help you.

 

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NEW SILK ROUTE, WILL CHINA DOMINATE THE WORLD?

In 2013, the President of China, Xi Jinping, presented a project that includes the development of infrastructure to facilitate the exchange of goods through land and sea corridors around the world. Currently, 80 countries participate in this project, whose official name is ” Belt and Row Initiative ” , referring to the ancient silk route used in the times of the Han Dynasty, in the first century BC. This initiative consists of the financing by the Chinese government of infrastructure around the world in exchange for political, commercial and strategic benefits.

China is the second economic power of the planet and, according to experts, it has the potential to become the most important commercial power in the world. China went from being one of the most impoverished countries in the world, after the policies of Mao Zedong “One Step Forward” and the “Great Cultural Revolution”, to be the main creditor of developing countries for the construction of infrastructure.

Among the objectives of the New Silk Road are: to facilitate regional development by eliminating barriers to trade, increase communications with neighboring countries and increase the flow of raw materials to China. To achieve these ends, we seek to create alternative maritime and land routes to those currently used, such as the Strait of Malacca and the Suez Canal, where 20% of world trade passes through.

It is estimated that this initiative could generate a market ten times greater than the United States. To fulfill this colossal goal, resources are available from the New Development Bank (composed of the BRICS countries: Brazil, Russia, India, China and South Africa), the Silk Road Fund and the Asian Investment and Infrastructure Bank (origin Chinese). Likewise, if the stated objectives are met, this initiative would add 56,000 MDD to Chinese exports and 61,000 MDD to imports, which represent 36% of world GDP, according to Euler Hermes consultancy reports . However, the International Monetary Fund warned that “resurrecting the silk route … can also lead to a problematic increase in debt, creating challenges for the balance of payments.”

One of the great advantages of these Chinese loans to finance infrastructure is that they are bilateral in nature. This allows loans, despite being more expensive, to be more advantageous and flexible compared to loans provided by multilateral institutions such as the World Bank. This makes them extremely attractive to countries that have restrictions in accessing international financial markets such as, for example, Venezuela. It is worth mentioning that, although these Chinese credits are given with fewer restrictions than others, the conditions always benefit the Chinese economy, for example, in the case of Ecuador it was stipulated that only Chinese companies would be used to develop the projects with this country.

According to Stephan Monier, Chief Investment Officer of Lombard Odier , China has found a way to acquire a central role at a global level while the United States is losing it due to the adoption of protectionist policies. Thus, this initiative has accentuated the economic rivalry between China and the United States, generating geopolitical frictions due to the capacity of influence that the Chinese government has gained in the international concert.

This new area of ​​influence is the result of the fact that, with the New Silk Road, China is reinforcing and increasing its presence in Asia and Europe, that is, places where the United States traditionally exerted influence. Likewise, China has considerably increased its presence in African countries, where it finances the construction of entire cities in, for example, Kenya, Guinea, and Ethiopia. Thus, this program has strategic implications for world politics since it could generate the legitimacy of Chinese actions, especially in the South China Sea, where there are tensions with its neighbors for their sovereignty, on the part of the international community.

There are still many elements to analyze in order to measure the degree of success of this project. However, the first steps have been taken, the world has to be prepared to take advantage of the advantages that this brings and, at the same time, protect against the threats that come with a project of this magnitude.

 

Are you interested in knowing what opportunities and risks your company has as a result of Chinese economic policies? Write to info@riesgospoliticos.com.mx to provide you with the advice you need.

 

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