China is a powerful competitor with one Achilles heel. For all their manufacturing might and technical know-how, they still need to import one key piece of technology.
Their most important company, Huawei, is dependent on importing high-end chips that power their smartphones and switches and routers, etc.
China tried to steal the IP behind these technologies after attempts to reverse engineer them failed, but as of right now they are unable to produce the intricate and delicate advanced chips.
Trump threatened to cut them off from these chips which would have destroyed Huawei, but he relented in a good faith effort to make a deal with China two years ago.
Now, the gloves are off and China has two choices agree to fair trade or suffer. The Chinese media wants to portray this as an embarrassing capitulation they cannot abide but Trump is only asking for a fair deal.
The Trump administration’s decision to sanction and potentially cripple Chinese telecoms giant Huawei Technologies Co Ltd garnered a sharp rebuke on Thursday from Beijing, which warned that the move could damage trade talks.
Shares of Huawei’s U.S. suppliers also fell on fears the huge customer of U.S. chips, software and other components would be forced to stop purchases after the U.S. Commerce Department banned it from buying U.S. technology without special approval.
Huawei said in a statement that losing access to U.S. suppliers “will do significant economic harm to the American companies” and affect “tens of thousands of American jobs.”
“Huawei will seek remedies immediately and find a resolution to this matter,” the company said.
The U.S. crackdown, announced on Wednesday, was the latest shot fired in an escalating U.S.-China trade war that is rattling financial markets and threatening to derail a slowing global economy.
On Wednesday, the Commerce Department said it was adding Huawei and 70 affiliates to its “Entity List,” which bars them from buying components and technology from U.S. firms without government approval. [nL2N22R16X] The sanctions have not yet gone into effect.
Chipmakers Qualcomm Inc and Xilinx Inc were down between 3% to just over 4% on Thursday and were the biggest drags on the Philadelphia SE Semiconductor Index. Shares of optical components maker NeoPhotonics Corp fell the most and were down 14.7%. Other suppliers like Analog Devices and Finisar Corp were both down about 2% while Skyworks Solutions was down 4.4%, Qorvo 5%, laser sensor maker Lumentum Holdings was down 7.7%, and memory chipmaker Micron Technology 2.1%.