As I have pointed out before, the list of the West’s grievances aired against China is long and valid: industrial espionage, cyberattacks, disrespect of intellectual property, denial of market access, unabashed State subsidies, price dumping, export of environmental damage, currency manipulation, unfair trade practices, chequebook imperialism, human rights abuses, territorial expansion by force, or racism towards minorities come to mind.
The idea, however, to wage an ever escalating trade war against China in the hope that the world’s second biggest economy can be clubbed into submission is medieval and moronic.
The enlightened way to manage rivalry between nations was to sit down and talk things through. This was called diplomacy a couple of years ago, not the art of the deal. Instead of maiming each other in an act of mutual destruction you’d aim for incremental improvement for all sides involved.
Admittedly, the US has lost much leeway in this respect and is now considered so untrustworthy that the Iranians for instance see no point in sitting down with a party which does not acknowledge its own signature under international agreements. (But then, as stated above, the US has no desire for diplomacy anyhow. They prefer to accuse the Iranians of torpedoing Japanese oil tankers while the Japanese Prime Minister is on a State visit in Tehran. It’s Saddam’s invented weapons of mass destruction all over again.)
The US trade war with China is in full swing now with unpredictable consequences for us retail investors. The US has levied punitive tariffs on all of their imports from China, worth approximately $600 billion. This includes not only consumer goods but raw materials like steel, the production of US corporations in China, entire US supply chains and even the import of Chinese intellectual property.
And the US has embargoed Huawei, the world’s biggest manufacturer of telecommunication equipment and second biggest producer of smart phones behind Samsung. If you are the proud owner of a Huawei phone, essential functions like Android, Google or WhatsApp will not feature any more, thanks to Trump.
The question now is how China will respond. Its imports from the US are much smaller in scale and will therefore hurt US exports in total much less than US consumers are hurt by their own government’s China tariffs. China’s main US imports – IT, capital goods and energy – are essential for the country and tariffs, therefore, nonsensical. And world markets are communicating pipes. If oil prices drop in one corner of the world the whole market will follow.
But China does not need tariffs to punish US exports. It may simply choose to buy somewhere else. Soya beans in Brazil, fossil energy in Russia or Iran, coal from North Korea again. It will not buy iPhones, Caterpillar excavators, John Deer tractors, or Chevrolets. A taste of what will come is the ban on South Korean music or Japanese cars which were swiftly introduced in past conflicts with these countries.
China has learned from past mistakes
China as an outlet market is dead for the US, and those US companies not bundling up their China workshops quickly enough will be in dire straits. Arrests and legal harassments of their operations are guaranteed.
Lately some nuclear options are muted, like the disruption of the US sovereign bond markets or an export ban of rare earth minerals. China is a rare earth monopolist and, ironically, the US’ biggest creditor. The bigger part of its three trillion dollar-equivalent currency reserves are parked in US treasuries and FED funds. If China decided to sell out, the thinking goes, US interest rates would explode and a subsequent US dollar sell off would let the greenback plummet. The US as a borrower would be discredited and its budget deficits would become unsustainable. Why China, usually a much more considered and rational actor than the Trump administration, would decide to burn its hard-earned savings in such way is difficult to understand. Their own US dollar savings would melt down in an instant. This is the rationale of a suicide bomber, not of an economically astute agent.
A possible Chinese export ban of rare earth minerals, in contrast, would be a much more serious threat and was used against Japan a few years ago. China is today the world’s biggest miner and producer of rare earth metals. Its processing plants in Inner Mongolia meet more than 80 per cent of world demand.
The significance of elements like cerium, dysprosium, scandium, neodymium and its 13 tongue-twisting siblings is hard to exaggerate. They are used in fibre optics, the defence industry, high performance magnets essential for wind turbines, hybrid technology and hard disk drives, in audio equipment, for medical scanners, smartphones, digital cameras, laser technology and the development of high-capacity batteries. The economic advancement of the 21st century depends on this stuff.
Deng Xiaoping, the inventor of communist capitalism and father of today’s industrially successful China, had remarked already 30 years ago that while the Gulf had oil, China had rare earths. He must have thought of the 1970s OPEC embargo when he said that.
The problem with rare earths is not so much that they are rare. They are not. Cerium for instance is more abundant than copper. The difficulty is, they are dispersed and rarely found in economically exploitable concentrations. And they are toxic and messy to mine and harmful and expensive to recycle.
A few decades ago the US was still producing half of the world’s supply, the rest coming from India, Brazil and South Africa. Today, the only other sizable miner after China is Australia (15 per cent). Analysts estimate a demand deficit of 40,000 tons which will be soon exacerbated by the advance of renewables and electrical cars. Is this a strategic opportunity for China to threaten the US or to inflict painful damage?
China has weaponised its RE monopoly in the past, with a ban against Japan which had detained a Chinese fishing boat in its territorial waters. At the same time Beijing also tried to introduce quotas for market making. It did not work out that well. Japan, in defence, provided start-up finance to an Australian mining company, Lynas Corporation, which did not take long to deliver. Prices started to plummet and China had to drop its export quotas too to stay in the market.
It can be expected that any move by China to withhold exports will yet again boost mining elsewhere. The Mountain Pass mine in California, standing idle for decades, started operations recently.
It can be expected that China has learned from past mistakes. It may threaten with export bans, but it will not follow through with it. No need for us retail investors to buy Lynas, or MP Materials (Mountain Pass) when they will go public – with or without its Chinese minority shareholder, a victim too of China’s punitive import tariffs.
China has rapidly developed a world-class expertise in RE alloys and downstream products like super magnets. It is today even a net importer of RE oxides. To withhold such technology could prove more painful for the US and its allies than merely manipulating commodity markets for a short while. General Electric had moved its entire micro magnet staff to China in 2006 and closed shop in the US.
I wonder what Trump will tweet when someone tells him. He was already appalled when he found out that Harley Davidson has moved to Thailand. And this is hardly the hardware to gain technological supremacy.
Both GE and Harley are probably stocks we should avoid, by the way, and GE too. Furious presidential tweets can be quite damaging to the share performance of the addressee. Considering the current state of global politics, US stocks look increasingly expensive. Only few corporations will prove flexible enough to manoeuvre through this world of disorder. And investors big and small will have to choose between negative interest and probable loss.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com