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CNBC
13 minutes ago
- CNBC
Why the U.S.-EU trade agreement is unlikely to derail Europe's defense boom
Europe's defense stocks wobbled at the start of the week, as investors pored over the details — still lacking in some areas — of the framework trade agreement struck by the U.S. and European Union on Sunday. An initial concern was that a commitment by the EU to increase its purchases of U.S. goods, in particular military equipment, could come at the cost of the European defense firms that have staged a massive rally this year on expectations of a regional spending spree . Those include France's Thales , which fell 4.3% on Monday; Germany's Renk and Rheinmetall , which were down 5.1% and 3.3%, respectively, and Italy's Leonardo , which dipped 0.74%. Analysts told CNBC such fears were unfounded, and that European defense firms were set to remain the primary beneficiary of bigger national budgets in the coming years — particuarly since they lack the output capacity to meet all the region's needs themselves. According to a White House summary of the deal, the EU would make $600 billion in new investments in the U.S. by the end of President Donald Trump's term in 2028, in addition to the $100 billion that EU firms currently invest annually. It adds that the bloc "agreed to purchase significant amounts of U.S. military equipment," with Trump telling reporters that it would make "hundreds of billions of dollars" of arms purchases. In its own read-out, the EU said only that companies in the bloc "have expressed interest in investing at least $600 billion" in "various sectors" in the U.S. by 2029, specifying instead its intention to buy 700 billion euros ($810 billion) worth of U.S. liquified natural gas, oil and nuclear energy products, and 40 billion euros worth of AI chips. European Commission President Ursula von der Leyen did not mention U.S. military purchases in her own statement on the deal , which comes two weeks after she put forward a proposed 2 trillion euro, seven-year budget including a fivefold increase from current spending on defense and space. Overall, the EU has this year outlined plans to mobilize around 800 million euros in new defense spending as part of a major rearmament push, including via loans and the relaxation of fiscal spending constraints. Lack of capacity The numbers mentioned in the trade agreement are a source of uncertainty, Peter Schaffrik, global macro strategist at RBC Capital Markets, told CNBC. "For defense in particular, this is relevant as we know that not all of the European spending can be done with European firms. Therefore, it is unclear whether the sums mentioned are in addition to what was planned, and whether the spending takes place over a short or long time frame (i.e. 10 years) is also highly uncertain." U.S. military suppliers such as Lockheed Martin , Northrop Grumman and Raytheon were already expected to significantly benefit from higher EU spending as they extend existing contracts and win new ones, despite calls by European bosses and leaders to keep as much funding as possible in the region. Dmitrii Ponomarev, exchange traded fund product manager at investment management firm VanEck, noted that Europe accounted for approximately 35% of all U.S. arms exports between 2020 and 2024, and that the U.S. supplied about 64% of arms imported by European NATO states. The Stockholm International Peace Research Institute has "raised concerns about the EU's ambitions for domestic defense manufacturers, citing historical difficulties in scaling up production, cost inflation from protectionist policies, and a persistent mismatch between supply and demand within the bloc," Ponomarev said. "U.S. defense contractors are likely to be the primary beneficiaries of this deal. While European defense firms initially reacted negatively to the news, they could still benefit in the long term, assuming the overall size of the European defense market grows faster than local companies can absorb." Push to spend local Capital will flow from private sector companies to where it's seeking the highest return if the U.S. makes its economy, markets and regulation more attractive than Europe, said Dean Turner, chief euro zone and U.K. economist at UBS Global Wealth Management's investment office. But from the current announcement, it remains hard to know what is new and additional or was going to happen anyway, he said. "In my mind, timing is the issue. If countries wish to invest in defense equipment, their procurement options at this stage are somewhat limited. In Europe we have lots of defende manufacturers, but probably not enough with capacity to deliver that kind of boost to output," he said. "Of course some money will flow to the U.S., it has to as it's the only provider of a number of key NATO-compliant defense systems. A lot will flow to the U.K. I'd still be of the view that it's Europe's intention, which [French President Emmanuel] Macron and others have been clear about, that much more of this spending has to be done locally." "So just because of a trade agreement — I'd hesitate to even call it a deal at this point — it won't be transformational in terms of U.S. defence." 'Smoke and mirrors' Simon Evenett, professor of geopolitics and strategy at IMD business school and co-chair of the World Economic Forum's Global Future Council on Trade and Investment, said the word "investment" is used "very loosely in all of the Trump trade deals," including the recent announcement of a $600 billion U.S. investment commitment by Saudi Arabia . "You unpack it and it involves spending on defense, investments by the private sector, it involves a wide range of things. What does this mean in the context of the EU-US deal? At this stage, who knows," Evenett said. The European Commission has signaled that the $600 billion refers to private sector investment, implying no additional spending by European governments beyond energy purchases, he said. "In short, this agreement involves a lot of smoke and mirrors ... this deal just buys time for further specifics to be articulated."
CNBC
13 minutes ago
- CNBC
CNBC's The China Connection newsletter: Chinese AI companies are already making money
From startups to tech giants, Chinese companies are finding business demand for their artificial intelligence services, even as AI models elsewhere keep burning cash. AI can now resolve more than 80% of online customer questions at Toyota's joint venture with Chinese state-owned carmaker FAW, more than twice as many as it could address half a year ago, Wu Yongjian, vice president at Tencent Cloud, told me on Friday. Tencent provides some AI tools to the automakers. And now it only takes around two weeks to get Tencent's AI customer-service platform up and running, down from up to three months, Wu told me, as we sat inside the company's shiny new office in an up-and-coming Shanghai waterfront district. Over the weekend, Tencent announced an upgrade to its Hunyuan AI model alongside releases by other companies as the "World AI Conference" got underway in the city. While not every company is seeing a similar demand for their products and services, the focus on business opportunities reflects a shift underway in China in capturing the AI opportunity. And that's also reflected in job applications. Zhou Yuxiang, CEO of Temasek-backed startup Black Lake Technologies, told me on Saturday that in the last few months he's been getting resumes from AI model engineers who want to shift into developing AI for specific industry applications. "Before it was hard to get AI engineers," he said in Mandarin, translated by CNBC. Black Lake primarily sells AI tools to small factories in China to help them speed up production and better utilize capacity. Many of the business owners are experiencing "FOMO" right now because they missed out on the direct-to-consumer e-commerce boom of the past few years, Zhou said, adding that the cost to use AI has also dropped significantly. formerly Zhipu, on Monday became the latest Chinese startup to slash operating costs with an open-source AI model release. Its pricing undercut Alibaba-backed startup Moonshot's Kimi K2 model released earlier this month, and DeepSeek's R1 in January, which offered lower rates compared with what industry leader OpenAI was charging people to use ChatGPT. Open source AI models can be used for free, and even altered and distributed, without special permission from the creator. Users who opt not to download the model can access them via the cloud and pay per use. Many businesses are realizing they need to have better data in order to apply AI effectively. It's a foundational layer that's seeing huge demand, just like chips, even if monetization of the AI application takes time. Chinese startup DeepExi, backed by venture capital firms Hillhouse and BAI, says its AI system combines business-specific data analysis with AI models to "deliver zero hallucination outputs." That means the system does not make up results, as generative AI models are quite prone to do. CNBC was unable to independently verify the claim. DeepExi lists clients such as Han's Laser Technology and an unnamed public healthcare operator "that oversees 40 public hospitals and 100 clinics." The startup's revenue surged by 88.3% to 242.9 million yuan last year, DeepExi said in an April filing with the Hong Kong Stock Exchange for a planned listing. Data labeling, or annotating bits of information for better AI use, is also seeing surging demand. Beijing-based Haitian Ruisheng last week estimated its revenue in the first half of 2025 grew by at least 61% from a year ago to 148.9 million yuan. Its revenue in 2024 was nearly 240 million yuan. After excluding items, profit is expected to have more than doubled to between 4.5 million yuan and 4.9 million yuan in the first half of the year, according to the company's filing with the Shanghai stock exchange. Haitian Ruisheng counts ByteDance, Alibaba, Tencent, Baidu and several U.S. "Magnificent 7" companies such as Microsoft and Amazon as clients, Zhang Zhe, the company's secretary to the board, said in Mandarin, translated by CNBC. In China, the company sees the greatest monetization opportunities in education, healthcare and tourism, Zhang said, adding that there was also potential in smartphones and "embodied intelligence" — a category that includes robots. Haitian Ruisheng combines automated data annotation with evaluation by human experts, Zhang said, adding that AI requires global cooperation and his company was eying overseas markets, with a subsidiary in Singapore. Just days after the U.S. unveiled its AI action plan, the Shanghai-based "World AI Conference" opened Saturday with Chinese Premier Li Qiang announcing plans for a global AI cooperation organization. China called for supporting AI integration across industries, including manufacturing, healthcare, education and agriculture. Tencent has already taken steps in that direction. It has local partnership in Japan for a "virtual human service" that domestic businesses can purchase, Wu said. That's a digital avatar of a human, often used for livestreaming and other digital content. Other popular AI business lines in regions such as Southeast Asia include "know your customer" identification verification for finance, translation services as well as a platform for developers to develop AI agents, Wu said. With these business projects — and broader state-backed ambitions — China has clearly gone beyond the labs in the global AI race. Treasury Secretary Scott Bessent: Trump has 'final say' on all trade deals Treasury Secretary Scott Bessent joins 'Power Lunch' to discuss how trade talks happen, what's pending the President's approval and much more. EUCham in China: Beijing needs to address market barriers to foreign companies Jens Eskelund, the president of the EU Chamber of Commerce in China, says that European businesses in China believe in the economy's long-term potential – but have concerns around imbalances in trade, transparency, and market access. Watch CNBC's full interview with U.S. Trade Representative Jamieson Greer U.S. Trade Representative Jamieson Greer joins 'Squawk Box' to discuss the latest developments on U.S. trade negotiations, details of U.S.-EU trade deal, state of U.S.-China trade talks, and more. No U.S.-China trade truce extension yet. A possible extension of a tariff pause between Washington and Beijing will not be agreed to until President Donald Trump gives his nod, U.S. negotiators said Tuesday. At least 30 people die in torrential rain. State media reported the deaths at the outskirts of Beijing after the capital city issued a red alert for heavy rain on Monday. President Xi Jinping called for more work on flood prevention and disaster relief in the broader northern region. China ramps up support for births. The country on Monday announced the equivalent of about $500 a year per child under the age of three, following plans to roll out free preschool education. Mainland China and Hong Kong stocks were mixed Wednesday as U.S. trade talks with China hang in the balance. Mainland China's CSI 300 rose 0.51%, while Hong Kong's Hang Seng Index — which includes major Chinese companies — was 0.45% lower as of 10:07 a.m. local time (10:07 p.m. ET on Tuesday). The mainland benchmark has gained more than 5% so far this year, data from LSEG showed. July 31: Politburo meeting expected Official PMI for manufacturing, services Nio to officially launch Onvo L90 electric car Aug. 1 - 4: China Joy gaming conference in Shanghai Aug. 1: S&P Global China General Manufacturing PMI Aug. 5: S&P Global China General Services PMI
CNN
an hour ago
- CNN
Analysis: Trump bludgeoned the EU on trade. Good luck doing the same to China
President Donald Trump isn't going to bulldoze China on trade like he did Europe. Two days after the EU agreed to a framework trade deal with the White House that some of the bloc's national leaders regard as a capitulation, Trump's negotiators left talks with Chinese President Xi Jinping's team in Sweden with no breakthrough. Following a flurry of trade deal announcements celebrated by the administration, China and the US are expected to carry on talking. But the lack of significant progress was a blunt reminder of China's power, the stakes it sees in standing up to Trump and how efforts to remake global trade will be incomplete without a deal with Beijing. Instead of another win, Trump's negotiators on Wednesday will present him with a proposal to extend a pause on historic mutual tariff hikes, which would otherwise hit on August 12. The president has a choice: either approve more time for more talks, which would suit Beijing, or revive a disastrous superpower trade war. It's hardly a choice at all. 'We're just going to give him the facts, and then he will decide,' Treasury Secretary Scott Bessent, who along with US Trade Representative Jamieson Greer led the US delegation in Stockholm, told CNBC Tuesday. No one is denying Trump's on a roll with trade. He can justifiably claim significant political victories with a series of framework deals with the EU, the UK, Japan, Indonesia and the Philippines that favor the United States by imposing one-sided tariffs. Trump's bet that other nations and trading blocs would have no option but to, in his words, pay more for access to the mighty American market has paid off. And, in his trade deals, he successfully opened up some previously closed markets to American manufacturers. Trump has long regarded Europeans as freeloading off American power. He's made good on his promise to substantially reinvent the transatlantic relationship, securing a 15% tariff on the EU's exports while forcing NATO members to agree to steep increases in defense spending by 2035. His hunch that allies are so beholden to the US on security that they'd fold on trade was spot-on. Trump is also flouting the conventional wisdom of most economic experts, and he's fractured the global free trade and low tariff system in imposing some of the highest duties since the 1930s. And so far, the global economic disaster that many predicted has not materialized. Most remarkably, he's acted to impose a personal obsession he's nursed since the 1980s — tariffs. But it may only be halftime. Many of the expected consequences of this new radical US trade policy are yet to kick in, including higher prices for American consumers that could quickly sour voters on the president's approach. Goldman Sachs estimates that it could take up to eight months for price hikes to show up. Other consequences of Trump's trade romp will also take time to become obvious. That's not stopping the administration's triumphalism. 'No one's moved as fast as the world has moved with respect to Donald Trump. He has moved the world in a way that no one can imagine,' Commerce Secretary Howard Lutnick told CBNC. 'He's done this in six months; this is amazing.' But China is looming in the path of Trump's victory lap. And the president may have met his match in Xi. He faces none of the constraints that spiked the trade guns of Europe — which was wary of antagonizing Trump and risking its military umbrella and its need for US support on Ukraine. And China's resistance is grounded in economics, sovereignty and politics that are existential for its Communist Party regime. No Chinese leader — especially one like Xi, who built his power on nationalism and restoring what Beijing sees as its rightful dignity and respect — can capitulate to an American president in a trade negotiation. China's centralized political structure, unlike the often-fractious 27-nation EU, also gives it stability. It also has cards to play that can hold the US economy hostage — including its dominance of the production of rare earth elements used in the manufacture of smartphones, smart weapons, satellites and aviation engines. China reacted to Trump's initial declaration of a trade war by blocking the export of the vital elements. It has since reopened the market, but the Trump administration is still complaining that Beijing is taking too long to approve all rare earth applications for US companies. But the fact that rare earths are a Trump card for Xi is not lost on anyone. Decades ago, China's isolated leaders didn't understand US politics. That's no longer the case. And it would not be surprising if they've already concluded that if they stand up to Trump, he'll back down. Calling China's bluff in these circumstances would be a massive gamble. It's not that China wants a trade war or would not be hurt by one. Its economy is plagued by problems. But its authoritarian system means Xi can impose more pain on his people than Trump might risk inflicting on Americans. It was almost alone among global trading powers in ignoring Bessent's admonition not to retaliate after Trump's tariff outburst in April. Bruce Stokes, a visiting senior fellow at the German Marshall Fund, argued that Trump's desire to visit Beijing later this year for a summit with Xi could also be crucial. 'This is not just about economics. (Trump) wants to be tough on China, I think that's indisputable,' said Stokes. 'But I think he wants even more so to have the opportunity to go mano a mano in Beijing, both for the optics of it and he believes he's a dealmaker who can strike a deal.' Stokes added: 'The Chinese experts I talk to think that the Chinese think that this guy can be manipulated. 'This guy, you can play him, and we'll see what happens.'' Trump's zeal for one-on-one dealmaking is antithetical to the protocol-laden approach of the Chinese. Chinese negotiators seek to shield their leader by ironing out agreements at lower levels. Trump's team seeks to set up theirs for grand photo-ops that fuel his 'Art of the Deal' ego. There's zero chance that Xi would fly to a meeting with Trump and improvise an agreement, then dole out sycophantic praise for his dealmaking as top European official Ursula von der Leyen did at the weekend. Bessent told CNBC that there was extensive 'pregame' planning in Stockholm, starting with 75 Chinese officials, compared with the 15 in the US delegation. Eventually, the teams were whittled down for the nitty gritty involving Bessent, Greer and Chinese Vice Premier He Lifeng. The Treasury chief insisted that the talks had made 'good progress' toward the US position on a 'clunky' Chinese system of controls on rare earth exports. Vice Premier He said that the talks were constructive and that the two sides would continue to push for a 90-day extension of the pause on reciprocal tariffs. But Bessent cautioned that China had jumped the gun on the pause before Trump weighs in. Of course, presidents make the ultimate decision in foreign policy. But this may be mostly optics. Trump needs to be seen as the big guy. But it's also a measure of his chaotic volatility that nothing is for certain unless he signs off. China's imperviousness to Trump's box of trade tricks is not the only reason why administration gloating is premature. Trade agreements are usually complex, running to thousands of pages after exhaustive negotiations between trade lawyers. The superficial framework agreements released by the White House, by contrast, show that nettlesome disputes in deals with EU and other trade competitors are unresolved. Such skimpy agreements could easily fall apart. Trump might also react to foot-dragging on details by lashing out with tariffs. And recriminations boiling within Europe mean it's not certain that the agreement reached on Sunday in Scotland will survive. Trump's business, personal and political life has always existed in a perpetual cycle of postponing reckonings. It's therefore typical that while he's touting his winning streak on trade now, he has no idea what lies ahead. It will take time to judge how the almost-certain rises in consumer prices will impact the economy. And the shock of tariffs will take months to work through supply chains and procurement schedules drawn up years in advance. This explains why Federal Reserve Chairman Jerome Powell is loath to slash interest rates despite Trump's fury. Tariffs may not kill economic growth and cause a recession, and businesses may adapt to the new certainty of duties between 15% and 20%. Higher costs could be shared by consumers, companies and suppliers in a way that eases some of the impact on voters ahead of next year's midterm elections. But while historically high, the tariffs probably aren't sufficiently punitive to force companies to undertake the massively expensive process of relocating production to the United States — an ostensible justification for Trump's trade wars. And Trump won't be in the Oval Office forever. CEOs may reason that his successor will likely temper protectionism, especially if the economy slows. Other difficulties also loom. Canada, unlike the EU, seems in no mood to sue for peace after Prime Minister Mark Carney won power on visceral anti-Americanism in the electorate. A prolonged trade conflict would hurt Canadians more than Americans, owing to the relative size of the neighbors' economies. But Carney can make things difficult for Trump. A sudden spurt of inflation early next year, perhaps triggered by the Federal Reserve chief Trump will appoint when Powell's term ends, could also undermine the fragile foundation on which the president's trade wins rest. This all explains why a real deal with China is so important. And Beijing knows it, so it's unlikely to fold.
