Trade Wars with China Are Not Good For the US Economy
Qualcomm has been pursuing a possible acquisition of Dutch automotive chip maker NXP in a bid to diversify its operations. The planned acquisition was valued at around $44 billion and was announced in late 2016. Basically, there are nine regulators in the world that were required to approve the Qualcomm and NXP deal. All the eight regulators had approved the deal by July this year, leaving China as the lone regulator yet to approve the deal. The termination of the deal is one of the demonstrations of the impact that bad trade relationship between countries can affect high profile mergers and acquisitions (Tom, Tim, & Don, 2018).
The dispute between China and USA intensified when Trump was elected into office in 2016 as well as the clash of issues associated with the ownership of patents and technology. Due to this divergence in opinion between the two countries, Trump’s administration played a big role in defining Qualcomm-NXP deal. It was anticipated that if the United States lifted the ban on chip makers working with ZTE, a Chinese corporation would open up the way for the deal to actualize (Balistreri & Hillberry, 2017).
China’s approval was necessary for Qualcomm since the country accounted for about two thirds of its revenue in 2017 alone. China therefore well new its importance in the deal hence had to hold their ground in order to make their position understood by the American counterpart. For instance, America imposed tariffs of $34 billion on Chinese imports into the United States with the Trump administration targeting to increase the tariffs to over $500 billion. China retaliated by imposing its own tariffs on American goods (Erceg, Prestipino & Raffo, 2017).
It beats logic however how possible that the Trump administration stepped in to protect Qualcomm from a hostile takeover by Broadcom but fail to oversee the smooth finalization of the merger with NXP. The tensions witnessed between the two nations extend beyond trade issues to include other matters such as strive for each to maintain autonomy as a superpower. For instance, the commerce department had imposed a ban on Chinese phone manufacturer ZTE preventing the company from purchasing American technology for more than seven years due to failure to comply with conditions issued by the department. This move definitely threatened to close business for ZTE. However, the ultimate lifting of the ban in June eased the tension for ZTE enabling it to resume the purchase of American technology and hence ascend the competitive ladder (Tom, Tim, & Don, 2018).
The failure to approve the deal after ZTE ban had been lifted demonstrates bitterness the Chinese administration had developed for the US sparking a possible trade war between the two states. Though the impact of the trade wars currently would be considered insignificant, it is still possible that the rising uncertainty would seriously affect stock markets in both countries. More importantly, it is perceived that the GDP of China would be affected by at least 0.5% if the trade wars persisted. Assuming that the proposed tariffs persist, in the longer run, the US importers will be forced to import from other Asian countries such as North Korea, Bangladesh, and Vietnam among others. However, it should be noted that the tariffs in place will not in any way impact an accelerated domestic production of targeted products within the United States (Erceg, Prestipino & Raffo, 2017).
The Effects of a Trade War
Given Mr. Trump’s long-standing criticism of the US-China trade imbalance and of NAFTA, and his broader skepticism of the value of international trade agreements and an escalation of trade disputes, cannot be discounted during his term in office. A series of moderate, largely symbolic protectionist measures, toward China and other trade partners, is more likely as the domestic economic implications of more radical measures dictate caution. The markets may be betting that Trump is right when he says that trade wars are easy to win. Other countries that depend on exports to the US may conclude that it is in their interest to back down. In early July, the European Commission was reportedly contemplating a tariff-cutting deal to address Trump’s complaint that the EU taxes American cars at four times the rate the US taxes European sedans (Tom, Tim, & Don, 2018).
But China shows no willingness to buckle under US pressure. Canada, that politest of countries, is similarly unwilling to be bullied; it has retaliated with 25% tariffs on $12 billion of US goods. And the EU would contemplate concessions only if the US offers some in return – such as eliminating its prohibitive tariffs on imported light pickup trucks and vans – and only if other exporters like Japan and South Korea go along (Wallin & Åström, 2018).
It could also be that the macroeconomic effects of even the full panoply of US tariffs, together with foreign retaliation, are relatively small. Leading models of the US economy, in particular, imply that a 10% increase in the cost of imported goods will lead to a one-time increase in inflation of at most 0.7% (Balistreri & Hillberry, 2017).
This is simply the law of iterated fractions at work. Imports are 15% of US GDP. Multiply 0.15 by 0.10 (the hypothesized tariff rate), and you get 1.5%. Allow for some substitution away from more expensive imported goods, and the number drops below 1%. And if growth slows because of the higher cost of imported intermediate inputs, the Fed can offset this by raising interest rates more slowly. Foreign central banks can do likewise (Balistreri & Hillberry, 2017).
For an economy such as China’s, a devaluation strategy will never work because even if the trade war persists it will not achieve a devaluation of the yuan. Additionally, the proposed tariffs by the US are prohibitive in nature but at the end achieves making the yuan less desirable internally but much appreciated internationally for storing value. Devaluation is not an option for China since its trade surplus in 2017 in goods and services exceeded its GDP by about 1.7% and it anticipates a drop in the value of exports by almost the same figure. In that regard, China’s current account balance would be at par hence no pressure to devalue (Wallin & Åström, 2018).
Why the Deal Was Of Value to Qualcomm
The Qualcomm-NXP deal would have brought quite good fortunes for the former owing to the fact that the smartphone market’s growth has slowed down tremendously. The momentum of growth in global smartphones market is projected to remain slow in the whole of 2018. The projection is informed by the low demand for smartphone devices. Additionally, less replacement purchases have been reported in the first quarter of 2018 according to Trend Force. The industry is faced with increasing costs of upstream components, a factor that is putting serious pressure on downstream phone vendors to reconsider their pricing (Balistreri & Hillberry, 2017).
The year 2017 ended with Samsung being the top performer in smartphone production and the trend is expected to remain constant in 2018. The company will continue the production J and A series after they achieved success in last year, therefore, its production volume is anticipated to reach three hundred million units which is a 5% YoY decrease. Apple came in position two last year and it is planning to roll out three new flagship models in the third quarter of 2018. Alongside production of these three models, the company is planning to expand the adoption of all-screen and Face ID technologies in the new models set for production in 2018 (Wallin & Åström, 2018).
Qualcomm aware of this trend in the mobile smartphone market, has been looking for ways and opportunities for diversification. If the acquisition of NXP goes through, it will accord Qualcomm a diversification opportunity; a chance to expand into other markets especially motor cars. The merger will also help the company whither fierce legal battles between it and Apple over patent fees. The acquisition will further assist the company grow in expertise especially when it comes to production of the chips and semiconductors. Currently, Qualcomm does not directly produce its raw materials but outsources other manufacturers to produce on its behalf. As long as the dispute continues, Qualcomm loses a substantial amount of income in form of patent fees from its main client Apple (Wallin & Åström, 2018).
The merger and acquisition is more important and strategic for Qualcomm for it will not only help it diversify, but also give it an opening to venturing into the Internet of Things, automated factory floors, smart infrastructure, wireless health care devices, as well as connected cars. Besides the progression in new industries, Qualcomm will also benefit greatly from the acquisition by acquiring an impetus and speed to fast adopt the Internet of Things and thus give them a very strong position in automotive. There aren’t a huge number of areas where products clash. The fact that there is not much product overlap makes this a good fit (Ossa, 2014).
Balistreri, E. J., & Hillberry, R. H. (2017, April). 21 st Century Trade Wars. In XX GTAP Conference, Purdue USA.
Erceg, C., Prestipino, A., & Raffo, A. (2017). The macroeconomic effects of trade policy. Federal Reserve Board (March)(unpublished manuscript).
Ossa, R. (2014). Trade wars and trade talks with data. American Economic Review, 104(12), 4104-46.
Tom, M., Tim, B., & Don, W. (2018, July 26). Subscribe to read | Financial Times. Retrieved August 8, 2018, from https://www.ft.com/content/223c3d30-9091-11e8-b639- 7680cedcc421? accessToken=zwAAAWTzYZzQkc8iPD0wkJER6NO2OXaAztzEIQ.ME YCIQCCvwFZwwX1oKUWUl-Kh_1Eq2KDZ94vj-- SlbG7OBJPGgIhAOG3IlKoGRoDR6BMfAhN8UqCGiCMMXkRZAkoXYJeEVdG&sh aretype=gift\
Wallin, E., & Åström, E. (2018). “Trade wars are good, and easy to win": A study of Trump’s steel tariffs and international trade.