Trump Unwisely Escalates Trade War: Expect a "Rare Earth" Response From China

Trump's imposed more tariffs on China. If China retaliates, Trump will respond with tariffs on all imports from China

A threatened, Trump Hits China with Tariffs on $200 Billion in Goods, Escalating Trade War.

> President Trump, emboldened by Americas economic strength and Chinas slowdown, escalated his trade war on Monday, saying the United States would impose tariffs on $200 billion worth of Chinese goods as punishment over Beijings trade practices.

> The fresh round of tariffs comes on top of $50 billion worth of Chinese products already taxed earlier this year, meaning nearly half of all Chinese imports into the United States will soon face tariffs. The new wave is scheduled to go into effect on Sept. 24, with tariffs starting at 10 percent before climbing to 25 percent by the end of the year. The timing will partially reduce the toll of price increases for holiday shoppers buying Chinese imports in the coming months.

> The White House also said that the United States was prepared to immediately place tariffs on another $267 billion worth of imports if China takes retaliatory action against our farmers or other industries.

> Unlike the first round of tariffs, which were designed to minimize the impact on American consumers, this wave could raise prices on everyday products including electronics, food, tools and housewares.

> American businesses which have warned that tariffs could hurt profits, force job cuts and, in some cases, destroy companies, said the taxes were going to hurt the United States more than the administration realized. The National Association of Chemical Distributors released a study this month that predicted nearly 28,000 chemical distributor and supplier jobs would be eliminated because of higher prices from the $200 billion round of tariffs.

Response Coming

The question not whether China responds, but how.

I would expect China to immediately pull out of Trump's recently initiated trade talks.

That's merely symbolic. Then what?

Four Ways China Can Retaliate

  1. Let the Yuan slide 25% negating the tariffs.
  2. Further limit US firms ability to do deals in China
  3. Place higher tariffs on US agricultural products
  4. Halt Rare Earth Exports. Rare earths are 17 minerals used to make cell phones, hybrid cars, weapons, flat-screen TVs, magnets, mercury-vapor lights, and camera lenses.

Point Four Threatened

> Lou Jiwei, Chinas finance minister until his recent retirement and now a senior Communist Party adviser, delivered an unexpectedly strong threat to the United States in a lunch speech at the forum, which is organized by a government agency reporting directly to the cabinet. Mr. Lou said that, if necessary in the trade war, China could halt exports to the United States of components that are crucial to American companies supply chains.

> Mr. Lou said that it would take years for American companies to find alternatives to China. To take a step back, the United States can establish an alternative supply chain in a third country, but it takes time what about the pain of three to five years? This is enough to cross a political cycle, he said.

Rare Earth Threat

Those comments from Lou smack straight of the rare earth threat I mentioned on August 2 in US Trade Policy: Not Only are We Stupid, We are Hypocrites.

This was my question: "Rare earths may not be that rare but how long does it takes to start a mine and produce what you need?"

China is the main supply of rare earth elements that are crucial in the manufacturing of a vast array of products, including smart phones, computers, light bulbs, electric cars, wind turbines, satellites, cruise missiles, and stealth aircrafts. Some elements, like neodymium and dysprosium, are highly demanded for the production of permanent magnets, which are used for sensors and motors of those products.

Yuan Devaluation

Don't rule out a yuan devaluation although that comes with capital flight risk for China.

Combination

An escalating combination of some of the above ideas seems likely.

What can Trump do?

I suppose Trump could foolishly respond with 50% tariffs on all imports from China.

Tariffs are a tax on US consumers and businesses that import goods. Please see my "Sanity Check": Does Government Know How to Spend Your Money Better Than You?

Also, please explore Trump's Claim of Using Tariffs to Pay Down $21 Trillion in Debt.

And in case you have not figured this out yet, Trump Doesn't Really Want Free Trade (He Just Wants to Make it Look That Way).

When it comes to trade policy, Trump is downright economically illiterate.

Addendum

A contact with ties to Boeing whom I respect just emailed "This could hit Boeing and the weapons manufacturers hard. There are no alternate suppliers.

Also consider Looming Threats In The Aerospace Raw Material Supply Chain

> As challenging as the aluminum situation is, there is an even more ominous scenario. Russia recently indicated that, in response to sanctions, it might cut off titanium supply to the U.S. Russias VSMPO-Avisma is the worlds largest aerospace titanium supplier. Boeing depends on it for 35% of its titanium supply, including critical parts for aerostructures and landing gear, and the companies have two joint production facilities in Russia. There is not enough capacity to replace Russian titanium, and the Boeing 787 and 777X programs are especially vulnerable.

Mike "Mish" Shedlock

Comments (51)
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Mike Deadmonton
Mike Deadmonton

Why not do all 4? I might also be tempted to sell treasuries while the value is high and pick up some gold, Euros, or Rubles.

Xi can afford a prolonged trade war - I doubt Trump can, especially since he can't even tell the Chinese what he wants out of this trade war. Chinese have known hard times. The 2008 recession may have been bad for a few, but not since the 1930's have we known really hard times.

Trump will in the end be the greenest president ever. If you can drop GDP significantly, say 10 %, imagine how much lower will be green house gas emissions. Maybe Trump is part of the deep state, the deep dark green state.

pi314
pi314

It would be unwise for the Chinese govt to retaliate. Their stock market has declined 25% (in local currency, add -9% in USD) from the peak in Feb. It can easily drop another 25% from here if they do something crazy. That said, sometimes saving face can lead people to act illogically.

Stuki
Stuki

China can also decide there are more important things for its legal apparatus to busy itself with, than collecting license fees for US based patent trolls.

Stan88
Stan88

What does Trump want China to buy more of from the USA to shrink the trade deficit? We already send China all the scrap steel and scrap cardboard we can produce. We don't produce anything else they want or need.

gliderdude
gliderdude

It will be very interesting to see if Trump can survive confronting corporations that control so much of the U.S. government. He is old and rich, and therefore fearless taking on those powers. I think he will ultimately be removed one way or another, perhaps by impeachment through a vote of consensus Dem and Repubs doing the bidding of their sponsors. Pence takes his place and drops the tariffs.