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Trump, Huawei, and the "Tech Cold War"

Written by Jason Stutman
Posted June 1, 2019

With the recent collapse of trade talks between the U.S. and China, and the subsequent ban of rising Chinese tech giant Huawei by President Trump, media outlets have finally found their choice of words for the rising political tensions between today’s two leading superpowers.

As of last week, outlets including Business Insider, Bloomberg, The New York Times, and several others have all begun throwing out the phrase “Tech Cold War,” along with “digital iron curtain.”

Clearly, the rhetoric is being used as a means of drawing a parallel between what’s happening between the U.S. and China today and what happened decades ago between the U.S. and the now defunct Soviet Union.

Sure, it’s not the most creative label for growing economic and political tensions between the U.S. and the "Middle Kingdom," but it’s a simple and effective way to phrase it for an industry that thrives off provocative headlines and easily defined talking points.

Of course, it should go without saying that drawing similarities to the decades-long Cold War requires a certain degree of hyperbole. Between 1945 and 1992, the U.S. tested more than a thousand nuclear bombs. At the height of the Cold War, we were a literal button push away from a launch that would have likely triggered a global fallout.

Suffice it to say, the stakes are much lower today than they were during the Cold War era, but that, of course, is quite a high bar to set. Hyperbole or not, the brewing “Tech Cold War” is real, and it’s threatening economic consequences (risks and opportunities) across the globe.

Designed in America, Made in China

For the last twenty years, the global technology industry has greatly benefited from a symbiotic relationship between the U.S. and China. Technology, designed in America by profit-minded entrepreneurs like Steve Jobs and Bill Gates, has been assembled, for dirt cheap, in China.

As much as U.S. nationalists will feel compelled to lament the loss of American manufacturing jobs to China, the fact is that the iPhone would cost up to $600 more to assemble and source domestically. If Apple wanted to keep its margins, you’d be looking at iPhones selling along the lines of $2,000 retail.

Needless to say, this isn’t a reality most consumers would be willing to accept, yet it’s a potential reality if the U.S. and China cannot come to terms on trade. We’re not there quite yet, but we’re escalating towards that point.

As Trump’s executive order banning Huawei was described by the South China Morning Post earlier this week [emphasis mine]:

Recent US trade moves against China are not short-term negotiating tactics from Trump, they are opening salvos in a new tech cold war...

Trump’s recent executive order was no doubt a turning point for the "Tech Cold War." Tariffs may be one thing, but targeted sanctions against China’s fastest rising tech company is another entirely.

Like any weapon in a trade war, the Huawei case is a double-edged sword. On one hand, Huawei is a critical piece of leverage for the U.S. and a powerful bargaining chip for Trump. On the other, it ups the ante in a way that many may not be prepared for.

When Push Comes to Shove...

Trump’s executive order shutting down Huawei, for one, was quickly followed up by threats from China to cut rare earth exports to the U.S. This would be truly devastating to the U.S. tech industry, as it relies almost entirely on imports from China.

All told, 80% of U.S. consumption of rare earth compounds and metals is through China. The country produced nearly 70% of rare earths last year and controls 35% of global reserves, giving it a borderline global monopoly on materials critical for today’s high-tech devices and energy sources.

The development has boosted the few rare earth miners operating outside of China, namely Lynas Corp (ASX: LYC) out of Australia and a number of junior miners in Canada. Aside from these few winners, though, pretty much everyone else touching the rare earth industry is under threat.

As it stands, Huawei has filed legal action against the U.S., contesting its ban as unconstitutional. The company has filed a “motion for summary judgement” in an attempt to bring the lawsuit to a relatively swift end in its favor. In short, the company is aiming to throw out a provision of law that pronounces it guilty of offense without due process.

The Eastern District of Texas court has scheduled a hearing regarding that motion for September 19. This means it will take at least several more months to get a decision, which will likely leave any negotiations between the U.S. and China in limbo.

Make no mistake: Huawei is now at the very center of the U.S./China trade war. The company continues to argue that its ban will slow 5G development, but experts outside of China have already called that bluff.

There is no doubt that Huawei will fill a void in markets where it is prevented from selling networking equipment, but that void can and will be filled should the time come. If it does, that will be a major boom for 5G technology companies outside of China, particularly a select few in the U.S.

In any event, 5G remains a critical investment opportunity in its early stages of deployment. We continue to recommend a number of big stock opportunities as these next generation networks roll out.

Until next time,

  JS Sig

Jason Stutman

follow basic @JasonStutman on Twitter

Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and Topline Trader. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.

Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.

Outside the office Jason is a lover of science fiction and the outdoors. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.

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