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Tech War

May 30, 2019

The intense frictions between the US and China go beyond the 400 billion dollars a year of imbalance in trade between the two nations.

The symbiosis of the golden age of globalization, in which China functioned as a low-cost production platform and the United States as the major consumer no longer responds to the interests of either country.

The China 2025 initiative released four years ago aims to increase the value of its production. The initiative is a roadmap to achieve technological leadership, set its own standards and substitute imports.

Among the industries in which it seeks technological leadership are robotics, green energy, aerospace, automotive, railways, maritime navigation, medicine, agricultural machinery, artificial intelligence, blockchain, new materials.

The plan aims to raise the content of domestic materials to 70%, which implies a strong displacement of foreign suppliers.

The US Council of Foreign Relations concludes that it is a real existential threat to US technology leadership. The Pentagon has warned that some of those technologies are key to military technology development.

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First effects. Trade between the two countries has fallen dramatically so far in 2019.

The escalation of trade barriers comes at a time when China is slowing rapidly and the US is at full employment.

At first it seems that China is the biggest loser because its exports to the US are much larger than the opposite flow. However, supply chain disruption is impacting investment decisions on both sides. Capital goods orders in the US have been stagnant for a year.

More than just tariffs. US tech companies are particularly vulnerable to potential retaliation from China, which could affect both their sales and production in that country. Such is the case with Apple.

In this hostile environment, foreigners have been net sellers in the US stock market since May 2018, with the consequent downward effect on prices.

Among the weapons that China can use is its mastery of new materials (rare earths). It produces about 85% of the world total and the US is critically dependent on imports to meet its requirements. These materials are used in the military industry: jets, lasers, missiles. They are also used in iPhones, turbines, electric vehicles.

Finally, there is China's holdings of US treasury bonds: $ 1.12 trillion. It is unlikely that he wants to get rid of that position, but it is certainly a weapon that gives him power in geo-political negotiations, in the face of a government with a fiscal deficit that has no prospect of correcting itself in the near future.

Can Mexico benefit from this war between the US and China?

What do you think?

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