Trade talks loom amid distrust of China, worries about tariffs

Electronics chiefs are focused on trade talks with China next week, many hoping for zero tariffs and market-driven conditions. (Getty Images)

Is negotiating with China on trade futile? Some U.S. business leaders and tech analysts seem to think so.

U.S. and China trade negotiators are meeting for two days on Tuesday in Shanghai to discuss a wide range of serious matters related to the electronics industry. Topics include IP, forced technology transfer, nontariff barriers, agriculture, services, and the trade deficit and enforcement, according to a statement from the U.S. Treasury Department.

Hayman Capital Management hedge fund manager Kyle Bass is doubtful a trade deal can be struck between the two countries, largely because “China never lives up to their promises,” he told CNBC on Thursday, going back to 2001 when China became part of the World Trade Organization.

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“At some point in time one of our [U.S.] administrative officials is going to hold their feet to the fire and this is kind of a battle of cultures because the Communist Party doesn’t want to submit themselves to anything measurable or enforceable. I don’t think an agreement could be had,” Bass said.

“I think you have to be careful when dealing with China. We have been too accommodating way too long,” added Roger Entner, an analyst at ReCon Analytics. He is concerned about loss of tech IP to Chinese competitors and the looming cybersecurity threat that China poses.

“Trade with someone who breaks the rules can still be advantageous for the other party. You just have to be cognizant of what the other party does,” Entner said.

Negotiating with China will be tough. It’s not something that many U.S. presidents have wanted to do going all the way back to the Clinton Administration and including the Bush and Obama administrations, Entner said.

Jack Gold, an analyst at J. Gold Associates, said a trade agreement with China is "certainly possible" but added, "the parties are pretty far apart and some things seem non-negotiable."  A prolonged trade war would hurt both economies but could be a long-term blessing in disguise for China, he added.

"That would force them to accelerate plans to be a powerhouse in tech where they don't so far compete, including high performance chips, complex software, operating systems and AI," Gold said. "They have the resources they could apply and if we force their hand, they may be much farther ahead in a short time than we expect."

Even so, many U.S. tech leaders are clearly hopeful the Trump Administration can press issues of years of theft and alleged theft of IP by Chinese engineering and manufacturing companies.

But there is also a subtle sentiment that U.S. electronics executives hope trade differences, tariffs and blacklists don’t hurt or even dry up billions of dollars in sales for chips and components to Chinese companies such as Huawei. Huawei, a large traditional buyer of U.S. electronics was added to a U.S. Commerce Department entity listing in May, meaning that many U.S.-made products could not be sold to the company.

In recent earnings calls, CEOs for both Intel and Xilinx said they adhered to the entity rules and stopped Huawei sales, then added back some products when it was clear those products didn’t affect U.S. national security. Some companies are also seeking licenses from Commerce to sell to Huawei and other companies while the blacklisting continues.

Intel CEO Bob Swan told analysts on Thursday that he is concerned that tariffs on goods traded with China could increase. “It’s still a little bit unknown about how this China thing will play out, and that’s a big important market for us and that makes me a little more anxious,” he said.

Noting that sales into enterprise and government customers fell 31% year-over-year in the second quarter, Swan added, “CIOs broadly speaking are a little more cautious as we go into the second half of the year, and when we take China into account, China is even worse.”

Electronics executives have not made specific public recommendations on what the U.S. should seek in a trade deal with China, but there does seem to be an impulse to let trade be driven by markets and not government oversight or intervention.

“We hope a resolution of these issues that led to U.S. and China trade actions is reached as quickly as possible so market-driven trade can resume,” said Xilinx CEO Victor Peng in comments to analysts on Wednesday.

RELATED: "Xilinx sees sales to Huawei down by half this fiscal year"

On Friday, Larry Kudlow, director of the National Economic Council, said he was optimistic for fruitful trade talks with China but added he “wouldn’t expect any grand deal” either.

And Kudlow didn’t rule out more tariffs. “In an ideal world you’d have zero tariffs,” Kudlow said on CNBC, while noting that President Trump has negotiated with the threat of tariffs “where necessary.”

“If the U.S-China talks go well, then no new tariffs. If not, the tariff tool might be used,” Kudlow said.

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