The Upside to Tech Trade War Hysteria

China Us

By: R. Scott Raynovich

If you haven't noticed, there's been some prominent debate about global trade, including the increasingly bellicose exchange of threats of increased tariffs between the United States and China.

The hysteria is exaggerated. It will subside. What's important is that this is a golden opportunity to improve and optimize the mutually beneficial technology trade relationship between the United State and China -- as well as other nations.

Global technology trade -- and particularly the relationship between the United States and China -- is a complex issue, but over time it has generated enormous amount of value. The iPhone is  a great example. The iPhone's core intellectual property and innovation -- software -- comes from the United States but is enabled and enhanced by the hardware, which consists of hundreds of parts being manufactured all over the world. Some of those parts come from China, some don't. The iPhone itself, of course, is manufactured in China. 

It's foolish and crazy to think that all of the sudden, an iPhone will be made with fewer parts, either in the U.S. or China, or that suddenly Apple will start making it in Iowa. Technology products require a global supply chain and wide footprint of labor and manufacturing -- there will be no rollback of technology globalization. What's important is that the U.S.-China discussion evolved and be pushed forward in a more civilized way.

The market fireworks -- easy to watch on the scoreboard with volatile swings in the market following announcements by the Trump administration -- have been exaggerated by aggressive rhetoric and press releases, including the threat of tariffs. One could argue with the technique, though it's hard to argue with the facts that there are issues in the relationship that need to be worked out. It's like a couple building up years of remorse that's ready to head into therapy. 

This Friday morning, after China tossed the latest firebomb back onto the U.S. side of the court with the threat of $100 billion in new tariffs, I was watching Bloomberg anchor Jonathan Ferro interviewing Larry Kudlow, the new economic advisor in the Trump Administration, on Bloomberg TV.

Hiring Kudlow was a good move, because Kudlow has polished communication skills, which isn't the most common trait in the White House. When he comes on television he tends to allay fears about the trade war and the market rallies. Kudlow said some very important things to say on Friday morning, which help clarify the facts:

  • Kudlow said there is "no trade war" -- only that the United States has brought up a list of grievances and suggested tariffs and the Chinese have had their own response
  • Kudlow said the major gripe with China is forced technology transfer and the theft of U.S. intellectual property
  • Kudlow said there is "no timeline" to the discussion. He made clear that it's an ongoing negotiation. 

Taking Kudlow's statements at face value, it's hard to argue with those facts. There are certainly issues to be hashed out. So now it's out in the open. The therapy session has become public. The Trump administration has made it clear that we want to fix some things about intellectual property and technology transfer. The Chinese have responded forcefully with their own threats, making clear they're not going to roll over. 

Everybody is going to want to save face. It's going to be a prolonged negotiation.

While I don't agree with much of what the Trump administration says, there's no denying that they are making some valid points about technology intellectual property rights and technology transfer. 

The fact that the market is starting to digest this news may be an early indication that the reaction to the threat of "trade war" is a bit overdone. It's good to have Kudlow out in front on the issue, because he seems to make the points more eloquently and diplomatically than the Trump administration's normal mode of diplomacy-by-tweet-bomb.

As Ed Yardeni, president of investment advisory Yardeni Research, said on Bloomberg Friday, "[the grievances] all seem pretty legitimate."

The solution may be to tone down the rhetoric and take these difficult discussions into the back rooms, where they can be handled by professional trade negotiators. Many months from now, I think that's where we'll be.