China bans Micron from projects tied to national security concerns

Strategas Securities Managing Director of Policy Research Jeannette Lowe and Interactive Brokers Chief Strategist Steve Sosnick join Yahoo Finance Live to discuss China's ban of Micron, citing national security risks.

Video transcript

- We've got trouble from Micron on the horizon as China is banning major firms from buying products from the chip giant. Saying they pose a national security risk. In a statement, the Cyberspace Administration of China said that the review found that Micron's products have serious network risks which pose significant security risks to China's critical information infrastructure supply chain. And this ban comes less than two months after Beijing announced an investigation on imports from Micron, which of course followed the sweeping ban Washington put in place late last year on selling advanced chipmaking technology to China.

Still with us, we have Jeanette Lowe of Strategic Securities, and Steve Sosnick of Interactive Brokers. So on this topic, I mean, there's a ton to really break down, especially given the international implications between two of the-- and geopolitical implications between two of the largest economies by GDP here. Steve, if we're kind of looking through a crystal ball to see how this plays out, because this is kind of gotten into a tit for tat landscape, if you will, where does this net out some of the kind of globalization efforts that these companies had looked for to build out their businesses as well?

STEVE SOSNICK: Globalization is clearly in reverse. I mean, and that's probably something that is a broader policy interesting problem going forward because globalization was one of the reasons why we really didn't have inflation for the better part of a decade plus, was because labor costs were going down on a net basis to multinational companies because they could outsource-- they could outsource a lot of their production.

Well, if that's going in the opposite direction, again, this is one of these things that it's additive to the inflation problem. It's not necessarily additive today, tomorrow. I assume that the reason they picked on Micron today is they must have been able to find some sort of domestic chip-- memory chip production that works for them because they wouldn't just stop using them if they didn't have some way to replace them. But this is not a good-- I was talking about headwinds before, this is one more headwind. It doesn't mean it pushes you back but it's definitely one more thing to be fighting against.

- Yeah. And in terms of how symbolic this is, I have read some commentary this morning that it's not going to have necessarily a huge effect on Micron specifically because it seems to affect their business chips and not their consumer chips, and their memory stuff goes into more consumer products in China, as I understand it. But regardless, the symbolism is important, Jeannette, right? I mean, as we especially this news coming just a few hours after President Biden had made some more positive comments about the direction that this was going, this definitely seems to belie that, doesn't it?

JEANNETTE LOWE: Yeah, I mean so if you look at what happened over-- first of all, I would just say the Micron investigation was announced back in March. So I think we kind of knew that this was coming to some extent. But then you also had Japan announcing that Micron was going to do some manufacturing there as well to kind of counter it a little bit. But this is important because as Steve said, we are going into this more globalization theme. We are starting to de-risk. That was a big theme of the G7. It's not about decoupling from China but it's about de-risking.

And I think the US has been trying to tone down the rhetoric over the past several weeks. You had Yellen's speech back in April where she tried to really say this is not about us going after China but this is about us de-risking and the US protecting its own national security interests. And so now, we have the situation where there is still this tit for tat where we put in export controls last fall. China is trying to react to that. And then China also reacted quite negatively to the G7 summit and the statements that came out feeling that it was an attack on China.

So I think there is these kind of dueling pieces that we have to be aware of, is that there is this trajectory of de-globalization where we are going to be moving more to reshoring and French shoring and just trying to make sure that key exports are not going to China where they might be able to be used for military purposes. But then at the same time, the US also does want to have a constructive relationship with China and they want to make sure the lines of communication are also open. And so they have to play that piece in there as well.

- What other, either chip companies, US-based chip companies, or some of the consumer products companies on the technology side could be kind of pulled into this broader discussion within China or have some type of exposure or risk as a result of this action?

JEANNETTE LOWE: Yeah, so they are going to probably-- I mean, the US also wants to take a look at more tech controls as well, I think, that that's going to be a continued effort. And so then you could just see retaliation from the Chinese side. I think as you point out, they have to kind of pick where they might have either an advantage where they might have supply that they can substitute for whatever product they might be targeting or they might be doing it for political retaliation purposes as well and they have to pick their target that way.

But the US is also going to be potentially even looking at limiting investments into China from the United States. And so there's going to probably be, I think, the tech sector is the one where you're probably going to see the most focused. But there will probably be other sectors down the line as we kind of move further into this greater theme. And I think that's one thing that you kind of have to be on the lookout for. This, again, was kind of heralded. I think people were expecting that Micron was going to be targeted. Others could still obviously be at play. But I think that problem is for China. They also have to make sure that they're not necessarily targeting certain companies where they actually might need them. There is this shifting the strategy on both sides to try to figure out where they can move products away from the other country for their own national security purposes. But then also to make kind of political statements on the world stage.

- Yeah, you don't want to shoot yourself in the foot, I guess, in that process. I guess I would ask you a similar question here to what we talked about with the debt ceiling. Is the market pricing this risk appropriately? It's a much more sort of amorphous longer term risk I think you could argue, so it's probably tougher to price in here.

STEVE SOSNICK: Markets are notoriously bad at pricing and geopolitical risk of this sort. It's kind of where we were talking about with the debt ceiling, that the specific stocks that were affected by the debt ceiling, those analysts really know what to do because that affects earnings, sales, et cetera. That's where markets are very good. This is fairly amorphous because you're trying to sort of pick a really moving target. I would say off the top of my head, the more complicated the chip, the less likely it is for China to ban it right now because it would be to, again, Micron is making relatively generic memory chips and that's relatively easy to replace. Something that Nvidia is making is probably a bit harder.

And so it really-- but this is-- but in terms of-- it becomes nebulous and stock markets are really not good with the nebulous. They're good at-- they're good at knowing how does this affect my bottom line.

- Right. Yes. Well, maybe we need a little more information before we can get there. All right, Jeanette Lowe of Strategic Securities, thank you so much for joining us. Appreciate your perspective this morning. Steve Sosnick of Interactive Brokers is going to stick around with us.