by Jim Rickards, Daily Reckoning:
On Saturday, Dec. 1, at the end of the G-20 meeting in Buenos Aires, President Trump and his team of trade and finance advisers had dinner with President Xi Jinping of China and his team.
The purpose was to discuss the ongoing trade war between China and the U.S. Trump’s team had presented the Chinese team with 142 specific trade demands.
The two sides went over the demands one by one during the course of their two-hour dinner. When they were done, both sides announced a 90-day “truce” in the trade wars. China agreed to negotiate in good faith on the demands and the U.S. agreed to delay the imposition of tariffs scheduled to go into effect Jan. 1, 2019, until March 1, 2019, to give the negotiations time to proceed.
This was not a final deal, but it did allow markets to breathe a sigh of relief. The initial response of the stock market was a rally.
But just hours after the Trump-Xi announcements, Canada arrested Meng Wanzhou, the CFO of Huawei, in Vancouver, British Columbia. The arrest was at the request of the United States, which had issued an arrest warrant for Meng last August on numerous charges including money laundering, espionage and selling telecommunications equipment to Iran in violation of U.S. sanctions.
Meng was arrested during a stopover in Vancouver on a flight from China to Mexico. She was avoiding U.S. territory but was apparently unaware of the U.S. arrest warrant and the degree of cooperation between Canada and the U.S. on criminal matters and extradition.Huawei is the largest telecommunications equipment manufacturer in the world and one of the largest tech companies in China. Meng is the daughter of Huawei founder Ren Zhengfei.
The arrest of Meng threw global markets into turmoil. The Dow Jones industrial average index fell over 1,400 points, a 5.5% swoon, from the close on Monday, Dec. 3 to the close on Friday, Dec. 7. As of the Friday close, the Dow was down for the month, quarter and year. By the way, as of today, Dec. 13, it’s still down on the year.
By Sunday, Dec. 9, Canada was asking that Meng remain in jail pending the outcome of a hearing on whether she should be extradited to the U.S. to face a criminal trial. Meng’s lawyers were arguing that she should be granted bail and was not a flight risk because she owned property in Vancouver. She also argued that her health would be adversely affected by further incarceration. The Canadian court took these claims under advisement and planned to rule soon on the bail and extradition.
On a recent trip to Nanjing, China, I was permitted inside a secure research facility of Huawei, one of the top technology companies in China. Huawei is the world’s largest telecom equipment provider and a leader in the global rollout of 5G smartphone systems. Canada has arrested the CFO of Huawei, who is being held for extradition to the U.S. on charges of money laundering, espionage and violation of U.S. sanctions on Iran.
The Huawei arrest was more than a shock to markets. It was also a shock to the U.S.-China trade war negotiations. Both sides pledged to keep the negotiations on track, but China was publicly outraged by the arrest.
China told the Canadian ambassador that there would be “severe consequences” if Canada did not immediately release Meng. China’s Vice Foreign Minister Le Yucheng told the U.S. ambassador to China that “the actions of the U.S. seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty.” Le also said, “China will respond further depending on U.S. actions.”
The Meng arrest is significant in its own right, but is even more significant when taken in the full context of U.S.–China relations and the possibility of a new Cold War.
Huawei is not only China’s largest telecommunications firm; it is a leader in the rollout of 5G technology for mobile phones. Huawei is alleged to have deep ties to the Communist Chinese government and the People’s Liberation Army (PLA).