Source:SafeHaven.com
On Friday the United States made good on its threat to ratchet up the trade war against China, after the two parties failed, after weeks of negotiations, to reach a deal.
The Trump administration hiked tariffs on $200 billion worth of Chinese imports to 25% from 10%, adding to the $50 billion in goods already being taxed at that level. The tariff hikes went into effect at midnight on Thursday.
The negotiations appeared to be going well up until a couple of days ago, when Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer accused the Chinese of reneging on earlier commitments.
Nobody outside the trade delegations knows what went on behind closed doors in Washington, but it appears to us that the American team just got played. Dealing with China, or other Asian nations for that matter, is different from negotiating with fellow North Americans, or Europeans. It’s important to come across as respectful, and calm. Shrewdness is valued. Bluster and strong-arming are frowned upon.
Chinese negotiators will seldom agree to the first draft of a deal; the more common practice is to go back on what was discussed and amend the agreement, knowing full well that the other side won’t accept. But that’s ok. Like a chess game, the Chinese delegation was likely awaiting the next US move. Instead, the American delegation slammed its fist on the chess board, immediately ending the game.
Now comes the punishment for not agreeing quickly enough to US demands. But anyone who knows Asian culture, understands that “losing face” is a big deal. They can’t, and won’t, give in to threats, for this shows weakness. Instead China’s commerce ministry said it would impose “necessary countermeasures” without giving any details.
President Trump said he’s in no rush to reach a deal - although in reality, his deadline is the 2020 presidential campaign - but he also remarked “the process has begun” to slap 25% tariffs on the remaining $325 billion in goods from China – which would raise the total value of Chinese goods being penalized, to $540 billion!
It’s worth noting that, with $250 billion of $540 billion worth of total Chinese imports to the US now under tariff, the States has a lot more room to the negotiate than China, which has levied import duties on all but $10 billion of the total $120 billion worth of US exports to the country.
So far this trade dispute has not seriously hurt either nation - although going by GDP numbers, the US is winning (agriculture, tech and automobiles are most affected).
The US Gross Domestic Product is at a healthy 3.2%, inflation is under 2%, the number of jobless is at a record low, and wages are even rising. China, on the other hand, is still bumping along at 6.4% GDP growth in the first quarter, the same as the last three months of 2018.
The bilateral trade deficit - something Trump has railed against for years - is narrowing, due to US businesses and consumers buying less from China and exporting more. In November 2018, the latest month available, the trade deficit fell US$2.8 billion to $35.4 billion, a fall of 7.3%, South China Morning Post reported.
Trade figures released on Jan. 14 showed China’s December exports to the US slowed to $221.24 billion, 4.4% less than December 2017.
“We find strong evidence that the 25 percent tariff on US$50 billion of imports from China [imposed in July and August last year] is having a significant negative impact on prices and volumes,” the Hong Kong-based news outlet quoted the Institute of International Finance, in an analysis of the tariffs’ impact.
US negotiators shouldn’t feel too emboldened by those figures, however. The China delegation has plenty of ammunition to fire at the US team should negotiations continue to stall. We know that Beijing must retaliate, in order to save face. Light punishments could include selling some US Treasuries, not participating in future US debt sales, devaluing the yuan, in order to make exports cheaper and entice US consumers to buy more Chinese products, or stop buying US soybeans, the US leading export to China.
All this is possible and will make stock markets roil, but we at Ahead of the Herd are thinking further ahead. We wonder what could happen if the aggro between China and the US escalates, and the two sides start looking at sectors to embargo.
This article looks at two of America’s most import-dependent commodities - rare earths and lithium - to get a sense of what could happen if China, due to the trade war, stops supplying US companies with these crucial technology metals.
Two aces in the hole
Most people don’t know it, but the US is dependent on foreign countries for over 20 critical metals, including battery metals used in electronic devices like cell phones and electric vehicles.
Without a reliable supply chain, a country must depend on outsiders. This gives foreign suppliers incredible leverage over the United States. There is always the possibility of slowed flows or bans on strategic materials, due to politics or trade disputes, such as the ongoing trade war with China.
If China were to suddenly refuse the sale of any of the 20 out of 23 metals the US deems critical to the economy or defense of the nation, the US economy would be in serious trouble.
The Trump administration recognized this when the president issued an executive order in December 2017, instructing his people to devise “a strategy to reduce the Nation’s reliance on critical minerals” that are largely imported.
“The United States must not remain reliant on foreign competitors like Russia and China for the critical minerals needed to keep our economy and our country safe,” Reuters quoted President Trump saying. The directive was a response to the USGS’ first assessment of US critical minerals since 1973. Its report concluded that the US relies on China for sourcing 20 out of the 23 minerals deemed critical for US national security and the economy.
Included on that list are the building blocks of the new electrified economy, including lithium and rare earths. China has a stranglehold on both of these metals, meaning it can use them as a cudgel in trade talks with the United States.