Trump’s tariff belligerence pays off once more as France capitulates over tech tax

After France unveiled plans to raise taxes on internet companies the US threatened to slap tariffs on French food. Now France is putting the new tax on hold.

Reuters reports that French President Macron had a great chat with his US counterpart Trump, at the end of which Macron offered to suspend the charge while negotiations continue at the OECD over an international taxation system for internet giants such as Google and Facebook. Having caved in less than two months after Trump threatened the tariffs, the smart money has to be on Macron quietly binning his tax and hoping everyone forgets all about it.

Apparently the French have always said anything agreed by the OECD would automatically supersede its own little tax, which makes you wonder why they bothered with it in the first place. If the aim was to show how big and tough Macron is by standing up to Trump you’d have to say it that has backfired somewhat.

Furthermore Macron can’t have been surprised by Trumps retaliation, since that what he does. If we choose to give Macron the benefit of the doubt we could guess that he was trying to play Trump at his own game by getting his retaliation in first and giving himself additional negotiating chips ahead of the OECD process. Maybe it will pay off but it’s a big gamble since he has now made it clear that he will fold before a show of strength.

India risks US wrath after Huawei thumbs up

India’s decision to allow Huawei to participate in 5G trials is certainly a win for the vendor, but it does add further strain to an already tenuous relationship with the US.

As a country, India has gone through an incredibly aggressive digital transformation in recent years. Reliance Jio democratised the digital economy, bringing the benefits of mobile internet to hundreds of millions who were priced out of the equation in bygone years. This is incredibly promising for the people of India and the Indian economy, but it also pushes the nation into the spotlight.

Thanks to an increasingly wealthy and digitally competent society, India is looking like a goldmine for other nations. Every country will want to secure a lucrative trade relationship with India, and for the US, it represents another battleground for China in the race for supremacy in the digital economy.

Aside from fighting the ‘red under the bed’, attempting to convince India to ban Huawei is a step towards eroding the Chinese telecom champions dominance on the technology world of today, and China’s influence on the 5G world of tomorrow. The US has already warned of the consequences of India working with China, and in particular Huawei, it has threatened to severely limit visa applications from the country, but India has seemingly ignored these threats.

India is heading towards becoming a tier one digital nation, but with this success comes the challenge of making friends. Countries will push, bicker and threaten to secure more valuable trade relationships, as well as try to get the upper hand over rivals.

India is walking the line of diplomacy, and unfortunately it is a very precarious trail. And such is the animosity between the US and China, it becomes very difficult to be friends with both.

Country Export Import
USA $44.3 billion (15%) $22.8 billion (5.5%)
China $14.8 billion (5.1%) $68.8 billion (16%)

India Exports and Imports value and percentage of total

As you can see there is a delicate balancing act in play. It is not as simple as choosing one superpower over the other, as one trade partner is the most valuable globally in each column.

Looking at the exports, heading towards China are a lot of raw materials. Iron ore accounts for 9.9% of the total exports to China, refined copper 12%, refined petroleum 3.7% and granite 3.6%. While these might not be considered the growth prospects of the economy, these industries are still incredibly valuable and employ significant numbers in the rural regions.

In terms of exporting to the US, diamonds account for 19% of exports, while packaged medicines make 14% of the total. What is worth noting, is that these numbers from the OEC do not include the service industry, the largest contributor to the Indian economy.

If a country was to value its relationship with partners on the value of exports, the US is the financial winner, however the industries which China underpins are likely to be larger employers in the country. The nuances become a bit more complicated, and that is before the import column is considered.

In terms of the goods coming into India from China, 13% of the total ($8.84 billion) are telephones (landlines, smartphones and feature phones). The OEC estimates that machinery (including consumer devices and computers) accounts for $38.9 billion of the Indian imports from China, perhaps due to the affordability of Chinese brands. These imports will be a significant factor to continue the drive towards the digital dream.

These statistics become important when you consider the other countries who are being heavily pressured by the US to ban Huawei.

Take the UK as an example. The UK has a valuable trade relationship with the US (11% export, 7.5% import), but it also does with China (5.6% export, 9.5% import). The US might account for more currently, but this might be down to the longevity of the relationship; China could be a more profitable market for the UK in the future.

Germany is also in a similar position to the UK. US and China account for 8.4% and 7.1% of total exports, and 5.7% and 10% of imports. In Italy, the US exports and imports are 9.3% and 3.8% of the total, while it is 3.4% and 7.2% for China. These are all countries which are resisting President Trump’s demands to ban Huawei.

What is worth noting is that there are countries which do not seem to be walking the fine line of diplomacy in the same manner. Australia, as an example, was one of the first to ban Huawei and to place its relationship with China at risk. According to the OEC statistics, China accounts for 35% of exports while the US only takes 3.5% of the total. In terms of imports, 24% come from China with only 10% heading across the Pacific from the US.

There is no hard and fast rule to explain why some countries have been swift to ban Huawei while others are sitting on the fence. Competition and reliance on the firms 4G equipment will be part of the reasoning, but the overarching implications on the relationship with China should not be ignored.

The conflict between the worlds two superpowers is incredibly complex, and there is certainly credibility to the argument that it is more than one country pushing back in the name of ‘national security’.

US and China reportedly sign tentative trade agreement

A bunch of existing and threatened tariffs between the US and China have apparently been scrapped thanks to what will hopefully be the first of many new trade agreements between the countries.

The news comes courtesy of the WSJ. It’s being reported as fact but still relies on the usual whispers from shadowy, anonymous sources. It reports that the two countries have agreed to a limited trade agreement that will reduce some existing tariffs on Chinese goods and avoid new ones due to take effect this Sunday.

Apparently the deal involves Chinese commitments to buy a bunch of US agricultural goods in return for a reduction in a bunch of tariffs. This would appear to mark a victory for Trump’s hard-line, transactional approach to negotiations with China. In keeping with that the tariffs would return if China reneges on its end of the deal.

This is being positioned as the first phase of a staggered deal with China, which also prioritises other US grievances such as intellectual property protection and currency manipulation. The next phase is expected to tackle even more tricky stuff regarding the involvement of the Chinese government in the functioning of its companies, which would presumably include Huawei.

Even the agriculture victory seems like a Pyrrhic one, however, as a massive reduction in Chinese purchases of US agricultural good has been one of the main forms of retaliation from the Chinese, so it’s possible that this deal will merely restore things to how they were a year or two ago. But then again maybe all this mucking about was necessary to create the opportunity to move to phase two.

China reportedly escalates trade war with ban on foreign computer kit

All Chinese public bodies need to replace all foreign computer hardware and software within three years according to a report.

The scoop comes from the FT, which says it’s a publicly-known instruction, direct from the Communist party – i.e President Xi Jinping. No clear reason seems to have been given for the directive, but it’s clearly part of a drive to make China as self-reliant as possible so it can’t be held to ransom by the US.

The biggest losers from this move stand to be Dell, HP, Apple and Microsoft, while they must be breaking out the bubbly at Lenovo. To what extent non-US companies might get a pass is unclear and presumably Taiwanese ones get a pass since China likes to insist it owns the place. Assuming that’s the case China is pretty well served by companies such as Acer, Asus, etc.

This particular move doesn’t seem to directly affect the telecoms industry, but the precedent it sets is ominous. By banning Chinese companies from its telecoms sector the US has made it clear it’s prepared to use business as a political weapon. This directive has apparently been in place for a few months and IT has presumably been chosen because that’s the industry China is best placed to be self-reliant in.

But while its easy to imagine the entire Chinese public sector using only Lenovo PCs in three years’ time, what software they will run on them is less clear. Microsoft obviously dominates globally when it comes to operating systems and productivity software, so a switch to home-grown equivalents feels like a massive undertaking.

That’s the real statement being made with this move, that the Chinese state is willing to do whatever it takes to be as independent as possible from the US when it comes to trade. It’s easy to imagine China extending this band to its private sector and, whenever it considers such a thing possible, to extend the ban to other industries such as telecoms. This geopolitical tussle between China and the US looks set to escalate a lot more before one of them blinks.

US finally starts processing Huawei entity list applications

Having sat on hundreds of applications by US companies to continue working with Huawei, the US government has announced it has finally got around to considering them.

News of this latest piece of glacial progress comes courtesy of Reuters, which has been chatting to unnamed people who reckon they know what they’re talking about. They say the US Department of Commerce is now deciding which of those applications to grant, but give not indication of how much of a hurry it’s in.

This development is presumably linked to the recent decision to extend Huawei’s temporary general license yet again. That, in turn, belies what has been fairly obvious for a while, that this whole Huawei saga is less about security than it is about the broader trade negotiations and general geopolitical tussle between the US and China.

The US has the power to cripple Huawei’s smartphone business by banning Google from working with it. This represents a powerful bargaining chip and one that is clearly in play during the negotiations. The clear implication from all this activity is that, if China gives the US what it wants in trade negotiations, it will back off from Huawei.

The US or cash? Huawei asks Poland to choose sides

Huawei has put its financially favourable foot forward, suggesting Poland will only get a cash boost if the vendor is allowed to participate in the 5G bonanza.

The role of Huawei in European networks has been under scrutiny for a considerable amount of time, and while it does appear it will be safe in numerous markets, Poland is one which is still hanging in the balance.

According to Reuters, Huawei is prepared to invest roughly $793 million in the country as long as it is allowed to sell equipment to the Polish telcos. While this might be enough to force some politicians into switching on the green-light, Poland is an area where Huawei has found itself in a bit of bother recently.

Back in January, a Chinese employee of Huawei and a Polish national working for Orange were both arrested on spying allegations by Polish security services. Evidence was not produced at the time, though concrete evidence has not been needed to ban Huawei in the US, or in countries such as Australia.

In terms of the US, Poland has had a strong relationship with the country for some time. Polish–US relations were officially established in 1919 and the country has remained one of the most stable allies of the US since. This filters down to the general public also, with Poland one of the most consistently pro-American nations in Europe and the world.

You also have to factor in more direct threats from the US. In February, the combative Secretary of State Mike Pompeo effectively suggested Eastern European nations would have to choose between working with the US or Huawei.

Looking at the Polish economy, a fractured relationship with the US would be difficult. Poland is the 24th largest export economy in the world, with the vast majority of exports heading to nations in Europe. However, the US is the largest single market outside of Europe for Poland, accounting for 2.7% according to Observatory of Economic Complexity, a MIT project.

With the US leaning so heavily on European allies to ban Huawei, seemingly as a means of putting pressure on the Chinese Government, Poland might turn out to be an interesting battle ground. Of course, you have to consider the cash incentive from Huawei.

Poland is effectively the Eastern European home ground of Huawei. The firm employs roughly 900 people in the country and will have a positive impact with its Polish supply chain. With further investments planned in the country, the direct impact of £793 million will keep the Polish Government happy, but there will be considerable knock-ons in other parts of the economy.

Another consideration for Poland will be market competition. Polish telcos will need a suitable amount of competition to ensure investments in network infrastructure is as low as possible. When you consider ARPU on mobile users, the demands become much more evident.

Orange’s Polish business currently has 9.7 million subscribers, each generating roughly £5.67 a month in revenue. For Play, Poland’s largest MNO, just over 12 million subscribers generate £6.71 a month for data services. For Polish telcos to generate ROI, competition between the network infrastructure vendors is clearly needed; banning Huawei might have some difficult implications to stomach.

Huawei knows this of course and is playing an excellent move. Poland will have to make a decision before too long; persist with its relationship with the US or effectively help Huawei gain traction in Eastern Europe.

Trade deal on the cards if Trump leaves Huawei alone

For weeks and weeks there has seemed to constantly be new stories to write about the US/China trade war, and on the eve of the G20 meeting, the dynamic duo haven’t disappointed.

This week, representatives of the 20 richest countries around the world will meet in Japan to discuss everything from fishing regulations through to finance and climate change. Telecommunications, and more specifically cybersecurity, will of course be on the agenda, and most importantly, it will feature in the meeting between President Donald Trump and President Xi Jinping.

Of all the bouts over the next couple of days, this will be the one everyone is paying attention to. The leaders of the worlds’ two largest economy, duking it out to gain supremacy. Trump has said he wants a trade deal, and so has Xi. These two nations not getting on is no good for anyone, but it seems neither wants to appear as weak and concede ground.

The latest development is coming out of Beijing. Xi has stated he is open to a trade deal between the two nations, but Trump would have to stop targeting Huawei as a proxy for passive and active aggression against the Chinese Government.

This is going to be a massive ask from the Chinese premier, as while Trump is fully willing to use companies as pawns in his greatest negotiation, the supporting cast in Congress might not be as willing. We’ve already seen this during the ZTE saga.

It might seem like a lifetime ago, but it was in mid-2018 ZTE found itself in the crosshairs of the White House. Trump built up the situation, seemingly as a demonstration of the power of the Oval Office, and once the point had been made he tried to stand down. But Congress stood in the way.

26 Senators, somewhat hardliners, attempted to block the de-escalation from Trump. They seemingly bought into the evil stories told by Trump as validation for such actions and weren’t willing to let the company off the hook. Trump wanted to play a game with ZTE as movable piece, but Congress wasn’t reading the rule book.

The same situation might happen here. Opinion in the US has been directed towards Huawei being the weapon of Chinese oppression on the world, and Trump has been the most vocal when it came to hyping the fear. Even if Trump does want to step down from this position to facilitate a deal, Congress might once again prevent him.

Trump seems to have done a good job in convincing politicians of the national security threat, and Congress does not seem to have the same game-playing attitude as Trump; if something is a national security threat, it will remain one. The opportunity of commercial gain will not change that.

This is of course assuming Trump wants to make a deal. Xi has played his hand, set out his demands with Huawei, and Trump seems to be just as combative. In interviews and tweets, the President has condemned Canada for tariffs on agricultural products, slammed India for its own tariffs and suggest China’s economy is ‘going down the tubes’.

Currently we have two Presidents who do not seem like they are going to shift. In their homelands they have created personas of strength, leaning on hawkish strategies not diplomacy. It would be fair to assume a continuation of the status quo.

G20 gets tough on tech tax as trade war gets agenda nod

20 bean-counters walk into a bar and ask for a tonic water. The barman asks who picking up the bill, and all fingers are pointed towards Silicon Valley.

In southern Japan, finance ministers and representatives of the central banking organizations have gathered to discuss the world of international and domestic finance. Of course, G20 is about much more than spreadsheets and calculators, but this weekend saw the accountants gather, while in the next room, ministers for trade and the digital economy were setting the world to rights.

Starting with the accountants, Silicon Valley is to remain the political punching bag of 2019.

“Specifically, in the area of international taxation, we will continue to have discussions on a review of the existing tax framework triggered by digitalization, in addition to fighting against tax avoidance and evasion,” Japanese Finance Minister Taro Aso said in a statement.

Of course, these politicians are savvy enough not to target a specific segment or highlight companies who are abusing the grey areas in the system. There are numerous different organizations outside of the tech sector who are mistreating globalisation trends for tax benefits, though the tech giants are the ones in the limelight right now.

In the G20 Finance Ministers and Central Bank Governors meeting, new ideas have been tabled suggesting governments around the world will be cracking down on the creative accounting techniques which are becoming ever-so-more common.

According to a communique seen by Reuters, the newly proposed rules would not only make it more difficult for the tech giants to make use of low-tax countries for their benefit, it would also work the other direction. Countries like Ireland, who have benefitted from offering loopholes to the tech giants, would have their freedoms curbed in the pursuit of fairness and a more level global approach.

The new rules would propose two different approaches to taxation. Firstly, companies would have to pay fair tax on the revenues which are derived in the country, and secondly, should the accountants find a way around these rules, a global minimum tax rate could also be introduced. It is the tax version of the Swiss Cheese model; the more layers which are incorporated, the more difficult it is to effectively create a tax evasion model for these organizations to follow.

For countries like the UK and France, this is a win, though the likes of Ireland, Luxembourg and the US will find the outcome frustrating. While the UK and France have been pushing for more stringent tax rules, Ireland and Luxembourg are attempting to protect the light-touch regulatory environments which benefits their own societies but screws everyone else.

The US has suggested any change to taxes was discriminatory to its own companies, effectively a raid on the US economy. Although US Treasury Secretary Steven Mnuchin has seemed relatively cordial in reaction to developments, it remains to see whether any further strain is placed on international relationships. The US is already struggling to maintain strong links with certain governments, and this presents another risk to stress relationships.

Mnuchin has also found himself in the news regarding the Huawei conundrum.

The US finance chief has said in Fukuoka that a trade deal between the US and China could ease the firm stance which is threatening to provide collateral damage all around the world. The statement quotes President Donald Trump, who made the suggestion over Twitter a few months back.

For those firms impacted by the ban, the reiteration of this statement might come as some relief, though critics will become increasingly frustrated. It seems the White House has little concern for collateral damage as long as its own ambitions are fulfilled. For the firms who supply products to Huawei or investors who have been left short by such a ban, the ease in which their livelihoods can be used by the White House as a disposable bargaining chip must be incredibly worrying.

This of course was a topic of conversation at the Ministerial Meeting on Trade and Digital Economy also.

“We continued our dialogue to mitigate risks and enhance confidence among exporters and investors, as we committed to do in Mar del Plata last year,” a briefing document states. “We affirmed the need to handle trade tensions and to foster mutually beneficial trade relations.”

While it might seem like a throw-away comment, perhaps we should appreciate the significance of recognising the situation. In most circumstances, governments would steer clear and allow the bickering duo to continue their chest-beating, however in recognising the circumstances perhaps we are closer to someone stepping in and de-escalating the situation.

Clearly neither the US or China can be trusted to be mature and manage the saga for a net-gain, so it might need a third-party to step in. As it stands, no-one is benefiting, and everyone is losing. The winner of this trade war will be the one which can be the least negatively impacted; that should not be considered an effective way to manage international relations.

Trump set to raise the stakes over Huawei during UK visit

US President Trump will reportedly threaten to withdraw some intelligence cooperation with the UK unless it bans Huawei, when he visits.

This insight into Trump’s intentions comes courtesy of the FT, which says it has been chatting to people involved in organising the visit. Those people told it that the Prez will definitely raise the matter when he’s over here and he’s not happy about the UK’s current refusal to do what it’s told by the US and ban Huawei outright from its 5G network.

“The president is preparing to repeat the message that Chinese involvement in 5G could pose significant challenges for US-UK intelligence co-operation. He is prepared to go hard on this issue,” an unnamed insider told the FT. Trump has always been a ‘go hard or go home’ kind of guy, so it doesn’t really come as a great surprise that he intends to persist with this approach when he’s over here.

Any awkwardness between Trump and out-going UK PM May will be significantly amplified by the leak, a month ago, that the government was planning to go US advice and let Huawei be involved in UK 5G to some extent. This was so embarrassing to May that she sacked her own Secretary of Defence on suspicion of being the leaker – an allegation he emphatically denied.

No more surprising than the FT story is the revelation from AFP that Huawei has long been the recipient of generous state assistance from China. Huawei has apparently received hundreds of millions of dollar in grants, been given land at a discount and even cheap loans to use as incentives for customers to sign on the dotted line.

Apparently Huawei annual reports reveal $1.6 billion in back-handers from the Chinese government over the past 10 year, at least half of which don’t seem to have come with any strings attached. The export credit side of things is supposed to be regulated under international rules, but we’re told that China has refused to abide by them.

While none of this behaviour comes as a big shock, it does feed into the broader US narrative of China cheating at global trade. Once more Huawei is being used as a proxy in this dispute and it’s hard to see what it can do about it. It’s no secret that China has done a lot to support internal champions, but it’s hardly alone in that respect.

So this particular side of the trade dispute comes down to degree. The US and Europe will claim their protectionism is within international trade rules while China’s isn’t. It could be that even the security concerns that have been the main stick to beat Huawei, and by extension the UK, with are just a proxy for this broader drive to force China to abide by international rules and that they won’t go away until it does.

Work with Huawei, or us, but not both – US Government

US Secretary of State Mike Pompeo has upped the ante with the anti-China rhetoric, declaring the US will not partner with countries who work with Huawei.

According to Fox Business, Pompeo has dropped the inference and made a statement which many countries will be cringing to hear. You no-longer have to read between the lines; it them or us Pompeo is declaring.

“If a country adopts this and puts it in some of their critical information systems, we won’t be able to share information with them,” said Pompeo. “In some cases, there’s risk – we won’t even be able to co-locate American resources, an American embassy and American military outpost.”

For countries like the UK and Germany, this is worst case scenario. These are countries which have vested interests from an economic perspective in both countries, and such is the state of affairs in the telco world, few can afford to strip Huawei out of the vendor mix. Pompeo is referring to administrative and military functions right now, but it would be fair to assume this could be extended to US commerce.

It’s a very tricky position to be in.

On one hand, there simply aren’t enough vendors in certain segments of the telco industry to generate suitable levels of competition to create the most viable economic position to fuel future infrastructure ambitions. Secondly, taking a vendor such as Huawei, arguably the leader in radio equipment, out of the mix would-be worst-case scenario for a technologist. Why would you want to ignore the best kit available?

However, on the other side of the coin, the security concerns are persistent, and do have some credibility. Evidence is circumstantial, some of the claims are hearsay, however you cannot ignore the risk. China does have a law which would force nationals to comply with its ambitions.

Should Pompeo’s statement evolve into more than chest-beating, numerous countries will find themselves in a painful tug-of-war. It does look like European nations are resisting the US’ Governments call to stonewall China, but this could come at a cost.

The US and China are two major trade partners of almost every economy in the world. To work with the US, you’ll have to ban Huawei, but if you ban Huawei you can almost guarantee there will be some form of reciprocal action from the Chinese Government.

The UK is an excellent example. Huawei has recently released a statement reiterating the investments the company has made in the UK, as well as the number of people who are employed as a direct and indirect result of its investments. Should the UK Government want to seize the post-Brexit trade carrot which has been dangled by the White House, some sort of action against China will be required. There is going to be a loss somewhere.

Poland is in a similar position. Pompeo is quoted as seeing “real progress” in the country after meeting Ministers in Warsaw, though if Poland was to ban Huawei it would certainly have an economic and societal impact; Huawei currently uses the country as its Eastern European HQ, employing roughly 900 people and investing substantial funds.

Over in Germany, China is a significant market for its automotive and heavy industrial exports, though if it was to submit to the US Government demands, you can guarantee there will be some sort of kickback.

All of these countries are now stuck between a rock and a hard place. Europe is proving to be a critical battleground in the US/Chinese war for technological supremacy, and while some narcissists might crave the attention, this is starting to turn into an impossible decision.