Trump Unwisely Escalates Trade War: Expect a "Rare Earth" Response From China
> President Trump, emboldened by America’s economic strength and China’s slowdown, escalated his trade war on Monday, saying the United States would impose tariffs on $200 billion worth of Chinese goods as punishment over Beijing’s 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.
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
- Let the Yuan slide 25% negating the tariffs.
- Further limit US firms ability to do deals in China
- Place higher tariffs on US agricultural products
- 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, China’s 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.
Don't rule out a yuan devaluation although that comes with capital flight risk for China.
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.
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.
> 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. Russia’s VSMPO-Avisma is the world’s 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