Dow Jones, Apple Recover; Why Huawei Is U.S. Trump Card In China Trade War

JED GRAHAM
4:43 PM ET

The Chinese patent ruling against Apple (AAPL) that helped sink the Dow Jones early Monday was just a paper cut — Apple stock rallied to close higher. But it sent a message to President Trump. As China's 'national champion' Huawei hangs in the balance, Trump has the leverage to extract major trade concessions or unleash a long-term China trade war that rips up worldwide supply chains and roils the global economy.

The Dow Jones dived 505 points as Wall Street fretted over detained Huawei CFO Meng Wanzhou, who faced another bail hearing in Canada. But the Dow Jones and Apple stock, the Dow's biggest loser in early trading, both rallied to close slightly higher on the stock market today.

Huawei, China Still Reliant On U.S. Technology

Trump tariffs, though potentially damaging for both economies, have become a sideshow in the U.S.-China trade war. The real fight is over global leadership in advanced technology industries. For now, the dependence of Huawei and the Chinese high-tech sector on American technology has left China highly vulnerable and in desperate need of trade deal.

Jefferies analysts Edison Lee and Timothy Chau wrote that Huawei is dependent on chip technology from Qualcomm (QCOM) and the Android operating system from Google parent Alphabet (GOOGL). "If Huawei cannot license Android from Google, or Qualcomm's patents in 4G and 5G radio access technology, it will not be able to build smartphones or 4G/5G base stations," they wrote.

The U.S. briefly banned doing business with sanctioned Chinese communications equipment giant ZTE, a de facto death sentence before Trump intervened. Now that Huawei CFO Meng Wanzhou is in custody and the company faces U.S. penalties for violating sanctions on doing business with Iran, one of the brightest corporate jewels could face an existential crisis.

China also depends on chip-equipment technology dominated by Applied Materials (AMAT), Lam Research (LCRX) and KLA-Tencor (KLAC).

"Outside of Applied, Lam and KLA, we believe alternative suppliers of the array of leading-edge semiconductor equipment that Chinese companies need to produce chips do not exist," Moody's wrote in a June report.

Xi Wants U.S. China Trade Deal

Despite anger over the arrest of Huawei CFO Meng Wanzhou, Chinese President Xi Jinping appears intent on meeting commitments made in his Argentina dinner with Trump. China may be able to weather Trump tariffs, but its vulnerability to a freeze-out of U.S. technology provides every reason to expect that a deal will happen. Trump wants to score a victory and almost settled for a quite modest one in May.

Still, the U.S. could overplay its hand by keeping Huawei CFO Meng in custody or demanding that Xi figuratively bow down to Trump.

The timing of the Chinese court ruling vs. older Apple iPhones was likely more than coincidence, with Huawei essentially on trial. It's a reminder that Beijing can seriously hurt U.S. companies using China as a manufacturing base and dependent on the country as a source of revenue.

In other words, both the stakes involved and the likelihood of a deal in the China trade war just went up.

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