The Wall Street Journal reports U.S. Turns Up the Heat on China.
The U.S. turned up the heat Wednesday on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing’s economic and military activity.
The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%.
Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad. The bill, which also restricts Beijing in areas ranging from cultural activity to military exercises, passed the House a week earlier and President Trump is expected to sign it into law.
Administration officials are confident they have the upper hand in the trade fight because the U.S. economy is strengthening while the Chinese economy shows signs of growing slack. Moreover, China is more dependent on trade than the U.S.
But that confidence so far hasn’t translated into action.
President Trump has threatened to apply tariffs to all $505 billion in Chinese goods entering the U.S. if the two are unable to reach a settlement. Washington has already applied tariffs to $34 billion worth of Chinese imports, with another set of duties on $16 billion in goods scheduled in the days ahead.
The U.S. threatened Wednesday to make the next round of tariffs more punitive. In a Monday White House meeting, Mr. Trump dismissed the original administration plan for a 10% tariff on $200 billion in imports—the next step in Mr. Trump’s escalation—and had his team bump up the levy to 25%.
Another Tariff Backfiring Moment
The administration didn’t spell out a particular rationale for increasing the tariff. People familiar with White House discussions say the reasons include anger over the Chinese government’s failure to approve the merger of U.S.-based Qualcomm Inc. and Dutch chip maker NXP Semiconductors , which forced the companies to scrap a deal aimed at boosting Qualcomm’s reach into new markets.
Both sides lose. That’s exactly what happens in trade wars.
More Losses Coming
The proposed tariff increase poses big risks for both the U.S. and global economy. A 25% tariff would boost the cost of a range of U.S. imports at a time when inflation has begun to pick up. It would become another factor for the Federal Reserve to consider as it decides how quickly to raise interest rates.
“This gets you nothing,” said Fred Bergsten, founder of the Peterson Institute for International Economics, a Washington, D.C., free-trade think tank. “It adds to inflation pressure and interest rates and [would] strengthen the dollar, which makes trade situation even worse” for the U.S., he said.
It gets less than nothing. Inflation will be temporary, and it will be followed by a deflationary collapse in trade.
Three Ways China Can Retaliate
- Let the Yuan slide 25% negating the tariffs.
- Further limit US firms ability to do deals in China
- 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.
Option one has capital flight risks for China of course. But US tariffs pose numerous risks to the US and global economy as well.
Option two is a given.
Option three is rarely discussed, but China has at least 80% of the global market.
China’s Rate Earth Monopoly
In August of 2017, The Diplomat commented on The Ongoing Efforts to Challenge China’s Monopoly.
Back in 2010, “rare earth elements” became a hot topic in the national security and foreign policy fields, mainly because of the political, economic, and security turmoil that followed China’s defacto embargo of those elements. In September of that year, China (the major supplier of rare earth elements) suddenly reduced its export quotas by 40 percent — not long after the collision of a Chinese fishing ship and a Japanese Coast Guard vessel in the East China Sea. Due to the export restriction, Japan found it difficult to fill its domestic rare earth demands, and as a result the world market price of the elements skyrocketed.
Eventually, when the WTO ruled against China’s export restriction in 2014, and the market price went back to the original (or even lower) level, media coverage on rare earths declined dramatically. Are the risks in the rare earth supply chain really gone? Probably not.
Called “the vitamins of modern society,” rare earth elements play a critical role in our daily life — in both the economic and security domains. These elements are key components 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 these products. The most noteworthy fact is that the more we go green and technology-oriented, the more important these elements become to our society.
Today, China enjoys a monopoly in the rare earths market. It is estimated that in 2016, more than 80 percent of rare earth elements produced in the world were excavated in China. The country is also believed to hold more than 30 percent of the planet’s remaining rare earth element reserves. While many stopped paying attention to rare earths after the dispute settlement at the WTO, the market has been preparing for more potential turmoil.
It is costly to find alternatives to low-priced Chinese rare earths, whether those alternatives are opening and reopening mines, inventing new recycling process, or developing substitutes. Nonetheless, in the current situation, where China not only has major control over global supply but has also begun stockpiling in preparation for future market demand, continuing efforts to diversify the supply chain portfolio are critical for the United States and its allies — from both economic and security perspectives. It is not sustainable to rely on Chinese rare earths, although they look very cost-effective in a very short term. Now is the time to revisit the powerful dynamics of rare earth elements and to establish a strategy to win the soon-to-be-more-competitive battle of the market.
Not That Rare? So What?
In April of 2018, The Verge reported China can’t control the market in rare earth elements because they aren’t all that rare.
The Verge contradicts its own headline in the body.
The whole process is “expensive, difficult, and dangerous,” says former rare earth trader and freelance journalist Tim Worstall. He tells The Verge that, because of this, the West has been more or less happy to cede production of rare earths to China. From the 1960s to the ‘80s, the US did actually supply the world with these elements; all extracted from a single mine in California named Mountain Pass. But in the ‘90s, China entered the market and drove down prices, making Mountain Pass unprofitable and leading to its closure in 2002.
Worstall says there are many reasons production moved overseas. Some of these are familiar: cheap labor costs and a willingness to overlook environmental damage, for example. But there’s also the fact that rare earth production in China is often a byproduct of other mining operations. “The biggest plant there is actually an iron ore mine which extracts rare earths on the side,” says Worstall. This means that, unlike the Mountain Pass mine, producers aren’t reliant on a single product. “If you are trying to only produce rare earths, then you’re subject to the swings and roundabouts of the market.”
In a paper describing the Minamitori find published in Nature Scientific Reports, the Japanese suggest a hydrocycle could use centrifugal forces to quickly separate out a lot of the unnecessary materials in the sea mud. But this method is unproven.
“Nobody has ever done it before, and no-one has proved it can work at an industrial scale,” says Professor Frances Wall of the Exeter University’s Camborne School of Mines. Wall tells The Verge that the Japanese team are doing “some nice work,” but says a huge amount of research has yet to be done before the seabed becomes a reliable source of these important elements. “There have been literally hundreds of exploration projects [that have found rare earth metals] and they’ve not been able to go forward through production because they can’t prove they’ll make any money,” says Wall.
Where’s the Mine?
Rare earths may not be that rare but how long does it takes to start a mine and produce what you need?
It was a WTO ruling that eventually led to the price collapse, some four years later! And if Trump has no use for the WTO, maybe China will decide the same thing.
Alleged Steel Glut
Let’s step back for a moment and look at what started this trade war: An alleged steel glut. China supposedly was dumping steel below cost.
Complaining about “dumping” is idiotic. If someone is providing goods cheaper than you or they can make them, you are getting one hell of a good deal! Period. End of story. If it hurts steel manufacturers, then it benefits thousands of other companies that use steel.
And tariffs pick winners and losers, mostly losers, all but the steel industry in fact. To argue about this is absurd.
When someone Tweeted about a steel glut today, I responded:
Is there a “steel glut”?
Are people paying to get rid of steel? If not, where is evidence of a glut?China produces more steel than it can use. Is that the basis?
If so, is there a soybean glut because the US produces more than it consumes?— Mike “Mish” Shedlock (@MishGEA) August 1, 2018
Oceans of Gluts
If there is a “steel glut” then there is a “soybean glut”. There are tens of thousands of gluts. Literally every export can be deemed a glut.
And again, if China is indeed subsidizing steel, then we should be eternally grateful. Instead, Trump spits in their face.
Amazing.
By the way, the US subsidizes Boeing and the entire defense industry by fighting needless, counterproductive wars. And what about the sugar lobby? Ethanol?
So not only are we stupid, we are hypocrites.
Mike “Mish” Shedlock
The idea that it is ok to move all manufacturing and heavy industry to China where it’s cheaper because we are believers of free-trade is just illogical religious ideology. Globalization was supposed to make the poor richer and eventually balance the cost of labor. It clearly hasn’t worked in a dollar pegged fiat currency system; where manufacturing is allowed to simply up and move to cheaper climes. Really though the idea of free trade is as idealistic as believing in smooth running governments free of corruption and graft. It belongs in the same rose lined basket as free markets, endless population growth, full suffrage democracy where political correctness and humanitarianism magically garner freedom, bliss and equality for all.
In the end, free-trade-globalization has simply turned wealthy countries into banana republics and service economies… pretty much exactly where a lot of 1st world countries are heading now. The only reason the US has any industry left at all, is largely because of its trillion dollar a year war machine; where ITAR regulations ensure the technology stays in the country. Coercing the world to adopt a US corporate-economic model hasn’t worked and bombing the countries that defy the new-world-order is a desperate, petulant attempt to continue an unworkable and asinine strategy. Tariffs are the inevitable next step along the road to lost control.
It is just amazing to me that no one concerned about global trade can see the elephant standing right in the middle of that room – even though Donald has pointed him out! That elephant is: that the whole purpose of Trump’s efforts is to REDUCE global tariffs and PROMOTE FREE TRADE! He has said so! The only way to accomplish that is to fight fire with fire – tariffs with tariffs – so the other trading partners are FORCED to come to the bargaining table and reduce tariffs overall. They simply will not do it unless they are forced to, and forcing them is exactly what Trump is doing. I think he’s doing a great job. Of course the liberal progressive socialist democrat Trump haters would rather die than admit that.
I would add to this great comment, what exactly should Trump do then ? The likely answer “nothing….everything is great already……for me”. Yeah, well Obama tried the ‘do absolutely nothing method of govt.’ and that resulted in the election of Trump, even though he was considered a complete joke of a candidate just a few years back. At least Trump is trying something concrete.
There are rare earth materials elsewhere other than China and China is leading that field because China has been selling those cheaply if you put up a factory in China producing products that require rare earths.
China complicating rare earth issues will lead to development of other sources of rare earths taking away China’s ace which will be detrimental to China long term so they would be extremely stupid to do that.
If China would let Yuan slide 25% then there would be a huge crisis in China because the cost of living is already too high compared to the wages being paid in China so that is NOT a possibility for China.
Putting tariffs on things US exports to China would further squeeze low wage Chinese workers.
Already the soybean tariffs are mostly hurting low wage Chinese so China is playing with fire.
The only legitimacy the communist party in China has is because economic growth and increase in employment and wages and if they start playing tariff games with Trump that could lead to the overthrow of Chinese communist party leaders either internally or externally in a coup or huge political crisis.
As long as Trump is more than happy to play the role of international boogeyman, the Chinese government will have no problems blaming whatever troubles people may face, on America.
“Let the Yuan slide 25% negating the tariffs.”
Just to clarify here, this is a loss for China, as it effectively means US buyers pay the same price for the same goods as they do before the tariffs PLUS China is putting around 25% into the US treasury (whereas today they keep that money). Agree with your larger points here though.
Letting Yuan slide 25% is NOT an option for communist party because China imports so much of the food China consumes so it would instantly create a crisis.
Even the tariffs on soybeans by China are playing with fire.
There are two separate issues with China. i agree that govt subsidized exports bring down costs and help the consumers in the US. Those jobs lost by this mercantilist tactic should be replaced by higher skilled jobs and industries in the US making us more competetive. This hurts in the shortrun but helps in the long run. Conversely the Chinese are hurt economically by these tactics in the long run. The same for their currency manipulation tactics. These all have adverse consequences for the Chinese.
The real problem is that we are basically selling them the weapons of economic mass destruction to do us in. They are engaging in illegal trades practices by extorting foreign business in China via IP theft and then making bootleg inferior copies. Forcing govt partnership with foreign companies along with outright extortion and corruption. This will lead to our demise. I don’t even care if they are trying to become self sufficient the competition is good but the outright Mafia like practices they engage in needs to be halted.
I’ve been involved with tech for decades, and the only Mafia like practices notable wrt IP, are engaged in by, predominantly US based, patent trolls and ambulance chasers exploiting a genuinely moronic US patent culture.
The exact same nonsense the patent trolls scream about wrt China, are being used to suppress startup domestic competition as well. With the result that the latter can no longer be ran according to sound engineering practices, by competent engineers. But instead have to kowtow to a bunch of ambulance chasers to dumb to be able to tie their shoes without help.
Which, of course, is the whole point of the exercise. The Chinese, after all, just like domestic startups, have the will and ability to do something with their knowledge. As in, they are actually productive people. Very much unlike the boat anchors running around whining about “IP violations,” and how “the gomminment should ban someone!! And rob them, and their customers, on my behalf!!!”
Here’s a hint: If some IP is so darned novel it demands orange haired baboons blowing up twitter to protect it; how come a bunch of second worlders, and some kids in California garages, seem perfectly capable of replicating it at will? And, much more importantly for economic growth, improving upon it if only left free to do so?
Hopefully you can selecively purchase autos made with defective bootlegged Chinese parts that they sell to us without consequence. You come up with some of the most innane commentary ever to justify Chinese predatroy illegal trade practices.
This misses the mark. For starters, Germany has the international stranglehold on hypocrisy, with their overpriced vehicles complete with fudged pollution and fuel economy readings. Not to mention closing down nuclear plants and replacing them with dirty brown coal power plants, while preening about reducing their CO2.
But you are right, Mish, that trade wars create losers. The 60,000 plants that have closed down over the last few decades while the US did not fight back against the long-running trade war — those are losers, along with the millions who used to have jobs there, and the lost tax revenues to US governments.
And who can think it is a good idea to receive dumped goods? Yes, some benefit short term from cheap goods, while others suffer from lost jobs and destroyed investments. And long term even the “winners” lose as they have to pay the higher prices the exporters will demand after destroying the domestic competition.
We will never get to true free trade by continuing to bend over and let the Chinese and the Eurotrash screw us. If we want real free trade, we have to fight for it. Why can’t you see that, Mish?
“If we want real free trade, we have to fight for it”
If we want free trade, all we have to do is stop meddling. Then trade will be as free as we can make it.
Then, If someone wants to “dump” gold, or some other metal, on our heads for half their going rate; that’s just a bonus. Or do you honestly believe China selling us their gold reserves for $500/oz, will somehow lead to some form of calamity in the US? What with all the miners in Nevada having to take a vacation and all…..
China has destroyed many factories in USA by selling products with low prices.
Those low prices are achieved by working the workers in China like slaves, paying them very little, controlling the value of the yuan to stop it rising, destroying environment and nature as a competitive advantage.
If this dynamic is allowed to continue it will lead to China being the factory of the world and USA being a debt zombie with no chance to pay those debts leading to China taking control of the USA economically.
The real and most important glut is in govt fraud, corruption, and hubris. If we can’t export it, can we at least pay the fraudsters not to produce it, and set them up in some Island paradise, like Vanuatu –
“It adds to inflation pressure and interest rates and [would] strengthen the dollar, which makes trade situation even worse” for the U.S., he said.
A win for savers and pension funds, which need higher interest rates.
Daniel Lacalle: “A Weak Dollar Will Not Make America Great.
Strong dollar policies favor domestically oriented companies, savers, workers and the middle class.”
True, but it blows up the balance sheets of foreign entities holding massive amounts of dollar-based debts, which, of course, is the real reason the Fed did not hike now. It is a rising dollar that forces the financial reset, and likely will bring about a new world reserve currency (likely a weighted hybrid, like the SDR).
High dollar in a situation while America is getting more and more into debt and when factories are still continually being offshored and the debt carrying capacity of USA is being destroyed will lead to just a bigger crash and make the crash come faster.
In the current economic situation dollar should be low to increase US competitiveness and lead to manufacturing in USA for US internal market being more competitive than importing products.
Low dollar would also help US exports.
Trump thinks he has the upper hand because (1) America is better off with no deal than with a bad deal; (2) the American economy is stronger than the Chinese one: they need the business but America can do without.
The Chinese think they have hand because (1) Trump needs to win elections, and they have relatively less worries about volatile public sentiment; (2) they worry about the future of the country if they position themselves as wimps who can be bullied.
Trump thinks the “enemies” will buckle (he was told by his advisors that they would not retaliate) because if it’s a bad deal for America, it’s advantageous to them, so they will be motivated to retain any part of it and, hence, will immediately grasp the fact that they have much more to lose. Trump will trumpet any (haggling) deal at all as a huuge victory for him.
Missing completely: (1) the realization that trade is the aggregate of mutually beneficial trade deals, otherwise they don’t get done; (2) any (attempt at) understanding of the other party’s point of view, or any facts at all for that matter; (3) how it could be that the whole world takes advantage of America; (4) how other countries are getting rich from America’s piggy bank when they are taxing their citizens to subsidize below cost goods just to shaft the Americans.
Economic analysis and models about the ramifications, tactics, and strategies kind of gloss over the extreme simplism on the part of the protagonist in chief.
Gold is not that rare either. There is more gold in the oceans than all the gold ever mined and all the gold (mine) reserves we know about. All you have to do is evaporate all the water and scrape the bottom!
Well, speaking about gluts, you all do realize there is a labour glut?
There are billions of human beings without a proper job!
AMEN to your summary Mish…