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First a Trade War, Now a Real War, Why US Exports to China Continue to Suffer

President Biden not only continued Trump's trade war with China, he escalated it. The most recent battle is over chips.
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US Exports to China vs Trump's Deal

Biden to Hit China with Broader Curbs on U.S. Chip and Tool Exports

Reuters reports Biden to Hit China with Broader Curbs on U.S. Chip and Tool Exports

The Biden administration plans next month to broaden curbs on U.S shipments to China of semiconductors used for artificial intelligence and chipmaking tools, several people familiar with the matter said.

The Commerce Department intends to publish new regulations based on restrictions communicated in letters earlier this year to three U.S. companies -- KLA Corp , Lam Research Corp (LRCX.O) and Applied Materials Inc (AMAT.O), the people said, speaking on the condition of anonymity.

The rules would also codify restrictions in Commerce Department letters sent to Nvidia Corp (NVDA.O) and Advanced Micro Devices (AMD.O) last month instructing them to halt shipments of several artificial intelligence computing chips to China unless they obtain licenses. read more

Some of the sources said the regulations would likely include additional actions against China. The restrictions could also be changed and the rules published later than expected.

Turning the letters into rules would broaden their reach and could subject other U.S. companies producing similar technology to the restrictions. The regulations could potentially apply to companies trying to challenge Nvidia and AMD's dominance in artificial intelligence chips.

One source said the rules could also impose license requirements on shipments to China of products that contain the targeted chips. Dell Technologies , Hewlett Packard Enterprise (HPE.N) and Super Micro Computer (SMCI.O) make data center servers that contain Nvidia's A100 chip.

Why US Exports to China Continue to Suffer 

I believe it should be obvious, but PIIE has an excellent discussion worth reading: First Trade War, Now Russia's Real War by Chad P. Bown.

US exports to China of energy and semiconductor products have fallen in 2022, as hardening geopolitics impacts global trade.

Energy is the most recent casualty in US-China trade. Once burgeoning US exports of gas, oil, and coal to China have largely ground to a halt in response to Russia's war. The United States is diverting more energy sales to European allies, and China has shifted to buying more from Russia, accepting Moscow's rationale for the invasion.

Energy trade is hardly the only alarming indicator. There are no signs that US manufacturing sales to China will ever rebound from the devastation inflicted by President Donald Trump's trade war. Even once thriving semiconductor sector exports seem to have peaked and may fall further, in part because of new and expanding US export controls stemming from heightened threats of military conflict. 

While agriculture overall remains a US export bright spot in 2022, products like pork, wheat, and corn face new worries. Moreover, a high value of export sales can be deceiving if it is the result of higher prices associated with global shortages and not higher shipments.

Worsening macroeconomic conditions have not helped US-China trade. China's COVID-19 lockdowns in 2022 and its weakening economic growth have slowed its demand for imports. These macroeconomic forces cannot entirely explain the deteriorating trade between the two countries, however, because US-China trade growth has done worse than each country's commerce with other countries. Even after controlling for those broad, economy-wide trends, China's import growth from the United States so far this year is 9 percentage points lower than its import growth from the rest of the world, and US export growth to China is 21 percentage points lower than its export growth to the rest of the world. 

Historically, manufacturing has accounted for the largest share of US exports to China. Those exports were devastated by the events of 2018–19 and have struggled since to return to pre–trade war levels.

US exports of semiconductors as well as the equipment that Chinese companies require to make their own chips may have crested. [Mish Comment: With Biden's export restrictions, they have certainly crested.]

Soybeans have traditionally been the leading US agriculture export, making up 58 percent of farm products covered by the purchase commitments in the phase one deal (measured in pre–trade war levels). Year-to-date exports are 52 percent higher than 2021 levels (figure 5). However, much of the increase derives from higher prices (volumes are up only 22 percent), and it is also still too early in the season to judge, as roughly 70 percent of soybean exports are shipped in October-December, according to US Census data.

The future of US–China trade in farm products is uncertain. In a recent interview with Inside US Trade, US Trade Representative Katherine Tai noted that "one of the things we've been really thoughtful about—whether it's in ag or also in industrial trade—is the degree to which we are vulnerable to China…. In ag it's probably as an export market." 

Key Idea 

There is much more in the report including five additional charts. But the conclusion says most of what you need to know.

Unless political relations between the United States and China improve—something neither side, especially China, shows any interest in—the energy sector may be a harbinger of things to come for agriculture and manufacturing.

There is no reason to believe relations between the US and China will do anything but get worse because of Taiwan.

And unless there is a breakthrough in the Russia-Ukraine war, the potential for further trade disruptions, especially in metals, is massive.

Russia and Ukraine Exports

On March 8, I commented US Sanction Policy Drives China Into Russia's Loving Arms

Here are the pertinent ideas related to this post.

  • Russia and Ukraine are key exporters of C4F6 and neon gas. Ukraine produces about 25% of the neon used in global semiconductor production.
  • Russia produces about 12 percent of platinum and 40 percent of palladium used in automotive catalytic converters.
  • Russia produces 3.9 metric tons of aluminum (6% of world supply). Russia and Ukraine together account for about 10% of global steel exports, according to SteelMint.
  • Russia is the third-largest producer of petroleum after the U.S. and Saudi Arabia, exporting almost 5 million barrels a day of crude oil in 2020, according to the U.S. Energy Information Administration.
  • Russia produces about 12 percent of the world's oil and 17 percent of its natural gas, according to estimates from J.P. Morgan.
  • Russia and Ukraine account for about one third of global wheat exports.
  • Russia supplies about half of Airbus titanium needs, while a U.S. industry source said Russia provided a third of Boeing's requirements.
  • Caspar Rawles, chief data officer at specialist consultancy Benchmark Mineral Intelligence (BMI), said that while Russia accounts for 5% of global nickel production, it supplies about 20% of the world's high-grade nickel.

Climate Policy Is a Much Greater Threat Than Climate Change

Even assuming the energy crisis is over (is it?) what about metals?

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For discussion, please see Climate Policy Is a Much Greater Threat Than Climate Change

President Biden, Elizabeth Warren and others want the Fed to take on a third mandate and stress test the economic impact of continued rise in temperature.

What needs to be stress tested is the reverse, the inflationary impact of a push for clean energy before battery storage technology exists, grid improvements exist, and whether or not physical metals for all the batteries that will be needed are even available.

In California

Meanwhile California Demands More Inflation, Bans Gasoline in New Car Sales by 2035

Questions Abound

  • Will the production of lithium, cobalt, manganese, and nickel be sufficient to make all the batteries? At what price?
  • Can the electrical grid take the strain?
  • Will there be enough charging stations?
  • Who will pay for all the charging stations?

Those are good questions and no one has the answers. But I do have the answer to one driving question.

Q: Will this do much of anything for the environment by 2035?
A: No, and possibly not by 2050 either.

Central bankers had the disinflationary wind of globalization at its back. Now it has a stiff breeze of de-globalization and de-carbonization blowing in its face.

Good luck with that.

Me First 

  • Biden escalated Trump's America First policy
  • China continues its China First policy
  • The EU has a Me First agricultural tariff policy that limits US and other foreign imports 
  • Russia and China control much of the metals needed for Biden's and California's energy mandates
  • The EU is in tatters over green energy madness 

Good luck with all that too, especially with the Fed merrily hiking away.

This post originated on MishTalk.Com.

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