China Takes Nuclear Option in the Trade War with Trump

President Trump is the first president in recent memory to deal squarely with China, and China doesn’t like it. China is used to American presidents letting them get away with everything.

President Trump said China couldn’t believe they were able to get away with as much as they did—they kept expecting one of the country’s former president’s to call and tell them to knock it off but nobody ever did.

That is until President Trump took the reigns.

Trump explains it simply in this tweet from the 2nd of May, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy.”

Trump’s way of leveling the playing field with China has been to impose tariffs on Chinese imports. Countries impose tariffs as a way to protect domestic producers by making it less profitable for foreign importers to import their goods to the country in question. Whoever buys the import pays the tariff.

To understand tariffs, suppose you were a U.S. based clothing manufacturer. You could buy fabric from a U.S. based fabric producer, or you could buy from a foreign producer. Traditionally, it would be cheaper to buy fabric from China. But with Trump’s tariffs, you’re now paying a tax on top of the cost of the Chinese fabric. The end result is it is no longer cheaper to buy Chinese fabric.

The result keeps money in our economy, provides revenue to the government, and serves as leverage in trade negotiations with a foreign trade partner.

So, this is what Trump has been doing with China. And China doesn’t like it. They have seen significantly less business from U.S. companies since Trump started leveling the playing field with Chinese goods. The cost/benefit dynamic has been controversial on the domestic side. But China has certainly felt the pinch on their end.

Trump has had his eye on unfair trade deals with China for years. In 2014, he tweeted, “US trade deficit hit $64B+ in April, 2 yr record high. We must do better. China is ripping us. Bring the jobs home!”

Unwilling to let go of their longstanding massive advantage in trade negotiations with the U.S., Chinese president Xi Jinping has revealed that he will be triggering one of his five “nuclear options.”

In 2018, ZeroHedge predicted that China would eventually take one of five “nuclear options” if President Trump continued to squeeze them with tariffs. They were:

  • A Currency Depreciation. A sharp, one-time yuan devaluation, […]

 

  • Sales of US Treasuries. Chinese authorities could sell some of its large official-sector holdings of US Treasuries, […]

 

  • Block US services. Chinese authorities could limit access for US companies to the Chinese domestic market, […]

 

  • Curb US oil shipments. According to Petromatrix, China is one of the biggest importers of U.S. crude oil at 400kb/d, so any counter-tariffs on crude could become very heavy for the U.S. supply and demand picture.”

The fifth “nuclear option” is withholding rare earth minerals. Signals from President Jinping make it seem very likely that China will be doing exactly that.

Rare earth minerals show up around the bottom of the periodic table of elements. They are elements like praseodymium and ytterbium. They aren’t actually rare, but they are extremely valuable. These materials are necessary for the manufacture of advanced machinery and are essential for the production of computer-based products.

If China withholds rare earth minerals, American manufacturers of advanced consumer products and business machines could find themselves up a creek without a gadolinium paddle. It would cripple U.S. based manufacturers- and bring a portion of our production economy to a screeching halt.

Anyone born before 1960 remembers the gasoline crunch of the 1970s. The bad news is, we could be about to see something similar with tech products. The good news is, we’ve survived this kind of thing before, and we can survive it again.


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