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
No. 1-25
sequoia512
sequoia512

You cant have free trade when only one side is trying. Our biggest export to China outside of garbage is food. There is only so much food out there. Since China has hundreds of millions of poor people a tariff would be harder on them than us. I can live a lot longer without a cheap Chinese trinket, than they can without food. At least Trump isnt burying his head in the sand, like the last 4 Presidents.

Escierto
Escierto

The Great Leader is the smartest person who ever lived. He is so far ahead of every other world leader. He is outsmarting everyone. We are winning and winning - all this winning is making me tired. Already they are going to remove the other four guys from Mount Rushmore and just put the Great Leader up there. Yeah that's happening right now as I write this. And Mexico is paying for the wall that is being constructed. So much winning!

truthseeker
truthseeker

Mish dont you think that as this trade war continues to escalate the bond market fears that in the short run this is going to cause inflation and that is the reason bonds are selling off dramatically today?

Carl_R
Carl_R

Does Trump really want free trade? I have no idea what, if anything, are Trump's core principles, nor what his goals are. I don't think it's worth the effort to speculate on that. The only thing that matters is what he does, not what he "wants", or "says".

MoreFreedom
MoreFreedom

The problems with China's 4 listed retaliatory options (and I'm curious as to what Mish would say regarding them):

  1. Letting the Yuan slide 25%, is essentially a tax on Chinese citizens, makes their goods cheaper, and reduces their revenues of dollars. Just more protectionism by the Chinese at Chinese citizen expense.
  2. Limiting US firms' ability to do business in China, reduces investment in China, reduces transfers of technology/trade secrets, and reduces the money Chinese put in their pockets. It's just more Chinese protectionism, at Chinese citizen expense.
  3. Increasing tariffs on farm imports from the US, increases Chinese consumer costs for food. More protectionism at Chinese citizen expense. Assuming the products don't just get sold via an intermediary to China bypassing the tariffs.
  4. China doesn't want to stop rare earth production, and would just sell to an intermediary who then resells to the US. Stopping production means money going into their pockets stops.

I'm sure Mish is quite familiar with these economic arguments. I completely agree tariffs economically hurt countries implementing them. The way I see it is Trump is trying to get China to end it's unholy protectionism, and pitting Chinese politicians against each other (who gets subsidies and protection, vs. those who do not) and threatening Chinese politician re-election chances due to declining prosperity.

The question to ask, is given China's highly leveraged position and level of debt, is whether a trade war hurts them more and sooner than it does in the US. I'd surmise their leverage and debt means they will hurt more and sooner. But will their stubbornness outlast the pain in the US? I'd guess they'll be coming to the table as their options (using political leverage in the US, trying to borrow more especially from the US, etc.) run out and threaten the Chinese politicians' protectionist gravy trains.

Trump after all, every time he implements tariffs, states he's willing to negotiate and remove tariffs. And Trump touts their trade negotiation successes.

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