Expect A Long Trade War: China Offers Tech Companies Five-Year Tax Break To Offset Tariffs

In the cleanest indication yet that China is hunkering down for what it now expected to be a very long trade war, the SCMP reports that China will give a "five-year tax break to its home-grown semiconductor makers and software developers in a bid to bolster the industries as the trade war shifts to an assault on Chinese technology."

On Wednesday afternoon, China's finance ministry said that in an attempt to bolster the local tech industry, integrated circuit makers and software companies will be exempt from paying corporate taxes for two years, starting in 2019, and in the following three years, their tax payments will be halved from the 25 percent universal rate levied on Chinese companies.

The announcement comes one day after the White House was reportedly considering cutting off the flow of vital American technology to as many as five Chinese video surveillance companies, including the biggest, Hikvision, and Zhejiang Dahua Technology. So far China's response has been largely muted, with China imposing retaliatory tariffs on US imports last week after President Donald Trump had earlier more than doubled duties on US$200 billion worth of Chinese goods.

According to the SCMP, the decision by the US "to impose tariffs on all Chinese products and put smartphone maker Huawei on a trade blacklist that could choke off vital components has severely damaged the fragile trust between the two countries, forcing China to re-examine the entire bilateral economic relationship to protect itself, according to Chinese researchers."

And while the escalation of US trade tariffs and the Huawei blacklisting have reinforced Beijing’s long-standing belief that it has to rely on itself for key technologies and resources, it appears that the opposite is happening, and as the following Deutsche Bank chart shows, it is, in fact, the US who has been shifting away its imports from China and toward the rest of the word.

(Click on image to enlarge)

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