Can the Market Free Itself From Tariff Jail?
The arrest of Meng Wanzhou is a big deal and it has investors spooked.
Canada’s apprehension of China-based Huawei’s CFO could not come at a trickier time for U.S. and China’s trade negotiations. This unexpected development comes just as the two sides attempted to put a friendly face on the deferral of new tariffs and places a significant strain on the already fraught relationship.
Canadian officials arrested Ms. Meng last week on the back of a U.S. extradition request. Almost one week later she is still held in Vancouver, where she was jailed on December 1. Her jailing has nothing to do with President Trump’s argument that China is forcing the hand of U.S. companies to share proprietary technology. Instead, the American government requested her arrest because it alleges that Huawei has dodged U.S. sanctions on Iran.
Earlier this week courts held a bail hearing to decide the fate of Meng’s release. You can see the stock market’s response in the chart below.Huawei is a privately run manufacturer of sophisticated networking gear. Cellular network equipment, like the new towers that will help shepherd in remarkably fast 5G communication standards, incorporate its highly technical components.
The company has touted itself as a pioneer in developing the standards that 5G requires. This expertise has long worried Washington, which fears that Beijing could compel Huawei to install spyware on its 5G devices.
This fear correlates to the core of President Trump’s beef with our trade relationship with China. While he argues that the dollars lost to our economy due to imbalances in exports and imports are unfair, one of his overarching platforms is that China has pressured American companies to open up proprietary “home-grown” technology as a requirement if they want to do business with them.
The Race for 5G
Late last month Mr. Trump said:
“China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property — such as forcing United States companies to transfer technology to Chinese counterparts.”
Huawei’s components for 5G are particularly sensitive to fears that China could somehow infiltrate the U.S. and other countries’ networks. The new 5G standard is hailed as being the fastest and most efficient standard to connect items in the Internet of Things (IoT). The 5G technology handles tasks such as the communication between self-driven cars or managing security of a building from afar.
The U.S. has already been relatively successful at blocking Huawei in dominating this sector. It convinced Australia and New Zealand to ban Huawei products from its 5G networks, and Britain’s BT Group (OTC: BTGOF) said it would remove Huawei’s products from its networks.
In return, Chinese officials are not mincing words.
The Chinese Foreign Ministry said over the weekend that it had summoned both U.S. Ambassador to China Terry Branstad and Canadian Ambassador to China John McCallum to address Meng’s detention, which it described as “lawless, reasonless and ruthless.”
It is yet to be seen whether Huawei has in fact broken the law or if its CFO is being used as a political pawn. What is painfully evident is that the stock market wants the trade and tariff issues resolved.
The market took a sharp turn lower last week on the news of Ms. Meng’s arrest, and sellers seem to be waiting to dump shares if both parties do not resolve these issues.
In the meantime, the sell-off is surely leaving some tech values on the cutting room floor. Perhaps what the market needs is a get of jail free card. A recent search on research service Capital IQ shows at least five networking stocks selling for less than 10 times next year’s earnings.
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