Here Are China's Five Options For "Nuclear" Trade War

After Trump ordered the USTR to consider an additional $100BN in tariffs, something we said on Wednesday would happen if the market was dumb enough to allow Trump to think he had a trade war victory by closing green...

...China has suddenly found itself in a quandary: as we showed first thing this morning, if Beijing were to continue responding to the US in a "tit-for-tat", it would be unable to retaliate to the latest Trump salvo of a total $150 billion in tariffs for the simple reason that the US does not export $150 billion in products to China.

Which doesn't mean that China is out of options; quite the contrary. The problem is that virtually everything and anything else that Beijing can do, would be a significant escalation. In fact, the five most frequently cited options are all considered "nuclear" and would promptly lead to an even more aggressive response from Washington.

Here are the five "nuclear" options that China is currently contemplating:

  1. A Currency Depreciation. A sharp, one-time yuan devaluation, like the one Beijing unexpectedly carried out in August 2015, could be used to offset some of the effect of tariffs.
  2. Sales of US Treasurys. Chinese authorities could sell some of its large official-sector holdings of US Treasuries, which would lead to a tightening of US financial conditions.
  3. Block US services. Chinese authorities could limit access for US companies to the Chinese domestic market, particularly in the services sector, where the US exports $56 billion in services annually and runs a $38 billion surplus
  4. 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. Such a move would weigh on U.S. prices and spill over to global oil pricing. As Petromatrix adds, the market would need to start balancing downward price risk of trade-war escalations with upside risk of Iran sanctions as oil flows could be about the same.

All of the above are mostly self-explanatory. The fifth option is one we first previewed back last August, in "Rare Earths Are China's Most Potent Weapon In A Trade War." Here is a quick reminder:

In October 1973, the world shuddered when the Arab members of the Organization of Petroleum Exporting Countries imposed an oil embargo on the United States and other nations that provided military aid to Israel in the Yom Kippur war. At the same time, they ramped up prices. The United States realized it was dependent on imported oil — and much of that came from the Middle East, with Saudi Arabia the big swing producer. It shook the nation. How had a few foreign powers put a noose around the neck of the world’s largest economy?

Well, it could happen again and very soon. The commodity that could bring us to our knees isn’t oil, but rather a group of elements known as rare earths, falling between 21 and 71 on the periodic table.

This time, just one country is holding the noose: China.

China controls the world’s production and distribution of rare earths. It produces more than 92 percent of them and holds the world in its hand when it comes to the future of almost anything in high technology.

Rare earths are great multipliers and the heaviest are the most valuable. They make the things we take for granted, from the small motors in automobiles to the wind turbines that are revolutionizing the production of electricity, many times more efficient. For example, rare earths increase a conventional magnet’s power by at least fivefold. They are the new oil.

Rare earths are also at work in cell phones and computers. Fighter jets and smart weapons, like cruise missiles, rely on them. In national defense, there is no substitute and no other supply source available.

Today, The Week's Jeff Spross picks up on this topic, and in an article "How China can win a trade war in 1 move" writes that "if things do spiral into all-out trade war, it's worth noting China has a nuclear option. I'm referring to rare earth metals."

These are elements like dysprosium, neodymium, gadolinium, and ytterbium. They aren't actually rare, but they do play crucial roles in everything from smart phones to electric car motors, hard drives, wind turbines, military radar, smart bombs, laser guidance, and more. They're also quite difficult to mine and process.

Some more details, and the reason why none of this is new to those who have been following the rare earth space and China's brief trade war with Japan back in 2010/2011:

Basically, if China really wanted to mess with America, it could just clamp down on these exports. That would throw a massive wrench into America's supply chain for high-tech consumer products, not to mention much of our military's advanced weapons systems.

In fact, China isn't just America's major supplier of rare earth metals; it's the rest of the globe's major supplier as well. And in 2009, China began significantly clamping down on its rare metal exports. Once, China briefly cut Japan off entirely after an international incident involving a collision between two ships. This all eventually led to a 2014 World Trade Organization spat, with America, Japan, and other countries on one side, and China on the other.

How did we get to this position where China has a near monopoly on rare earths:

Much of the story centers around Magnequench, an American company that emerged out of General Motors in the 1980s. It specialized in the magnets that account for most of the final components created from rare earth metals. But in 1995 Magnequench was bought out by a consortium that included two Chinese firms who took a controlling 62 percent majority share in the company. They also bought a big rare earth magnet plant in Indiana. Eventually, Magneuquench's manufacturing capacities were moved to China, and the Indiana plant was shut down.

Executive branch regulators do wield power over foreign investment in and buyouts of American companies, particularly through the Committee on Foreign Investment in the U.S. (CFIUS). But this was the post-Cold War 1990s, when optimistic enthusiasm for globalized free market trade was at a peak. CFIUS approved the initial takeover of Magnequench in 1995 under the Clinton administration, as well as the later shutdown of the Indiana plant in 2003 under the Bush administration.

Lawmakers and the Government Accountability Office criticized the agency and both administrations for their lackadaisical approach to the issue. Hillary Clinton even struck a rather Trump-ian note in 2008, trying to turn Magequench's sale to China into a campaign issue. But it was a tricky topic, given how her husband's administration got the ball rolling. So rare earth metals have occasionally turned into a political hot potato, but usually for only brief periods.

Which then takes us back to our August preview of precisely where we are today:

At present, the rare earths threat from China is serious but not critical. If President Donald Trump — apparently encouraged by his trade adviser Peter Navarro, and his policy adviser Steve Bannon — is contemplating a trade war with China, rare earths are China’s most potent weapon.

A trade war moves the rare earths threat from existential to immediate.

In a strange regulatory twist the United States, and most of the world, won’t be able to open rare earths mines without legislation and an international treaty modification. Rare earths are often found in conjunction with thorium, a mildly radioactive metal, which occurs in nature and doesn’t represent any kind of threat.

However, it’s a large regulatory problem. The Nuclear Regulatory Commission and the International Atomic Energy Agency have defined thorium as a nuclear “source material” that requires special disposition. Until these classifications, thorium was disposed of along with other mine tailings. Now it has to be separated and collected. Essentially until a new regime for thorium is found, including thorium-powered reactors, the mining of rare earths will be uneconomic in the United States and other nuclear non-proliferation treaty countries.

Congress needs to look into this urgently, ideally before Trump’s trade war gets going, according to several sources familiar with the crisis. A thorium reactor was developed in the 1960s at the Oak Ridge National Laboratory in Tennessee. While it’s regarded by many nuclear scientists as a superior technology, only Canada and China are pursuing it at present.

Meanwhile, future disruptions from China won’t necessarily be in the markets. It could be in the obscure but vital commodities known as rare earths: China’s not quite secret weapon.

Of course, there is no way of knowing if China will proceed with a rare earth export ban as its response, or whether it will pick any of these options. However, for those who are growing concerned - or convinced - that it's only going to get worse from here, there is good news: the VanEck Rare Earth ETF REMX makes it easy to make a substantial profit from the first nuclear trade war, should China clamp down on rare earth metals, sending their price to where they traded when China waged a brief trade war with Japan in 2011, when the ETF hit an all time high of $114. Needless to say, should China lock out the US, the price of rare earths would soar orders of magnitude higher.

Comments

CrazyCooter Four Star Fri, 04/06/2018 - 17:24 Permalink

China took over RE production because they have minimal environmental laws. Minerals that have very heavy elements (i.e. REs) are typically VERY toxic to process - and thus costly if done responsibly.

REs are "rare", but they are found all over the globe - the US produced them in mines in CA (shut down now).

This could prove a short term issue, but long term the US could bring up RE production to meet internal needs - it would just be more expensive than Chinese sourced REs.

Regards,

Cooter

In reply to by Four Star

Kayman CrazyCooter Fri, 04/06/2018 - 17:31 Permalink

Production of rare earths (yes, not rare at all) is being increased all over the world, up 50% already in Australia.

The only reason China is such a large producer of RE is RE mining is extremely environmentally damaging, but like all the rest of stuff made in China, the Chicoms don't give a fuck.

In reply to by CrazyCooter

BaBaBouy Kayman Fri, 04/06/2018 - 17:48 Permalink

"" These are elements like dysprosium, neodymium, gadolinium, and ytterbium. They aren't actually rare, but they do play crucial roles in everything from smart phones to electric car motors, hard drives, wind turbines, military radar, smart bombs, laser guidance, and more. They're also quite difficult to mine and process. ""

Good point... And there are Others...

They also produce most of the Cobalt for L-ION Batts. Thay could pick friendly countries to sell to, and inversely charge double to less so...

In reply to by Kayman

beemasters BaBaBouy Fri, 04/06/2018 - 17:53 Permalink

All options on both sides are lose-lose. The only way is to talk and negotiate a better deal with China....something that arrogant DC is refusing to do and probably leaving only as its last option. All US exceptionalism-based policies will not benefit the people. But then, no US policy has been for the common people for a long time. We can see the worlds' billionaires in US soil more than others.

In reply to by BaBaBouy

NiggaPleeze dark pools of soros Sat, 04/07/2018 - 14:15 Permalink

 

My vote is: impose a tariff on all Chinese goods equal to their currency manipulation.  I.e., if PPP shows that remnimbi is 1/4th what it should be, impose a 300% tariff on EVERY. SINGLE. CHINESE. GOOD.  Use that money to give a huge tax break to American workers, which will greatly reduce the cost of goods manufactured in the US (since about half the cost of US production is income and other payroll tax paid to employees).

Free trade does not mean no tariffs.  Free trade means everyone can trade with everyone else (in contradistinction to long periods in history where colonizers would only let their colonies trade with them).

The whole no-tariff thing is done by the oligarchs to enrich themselves at the expense of workers.  And since most workers are dumb-fucks who can't tell friend from foe or good from bad, they have gotten away with it.

In reply to by dark pools of soros

blindfaith beemasters Sat, 04/07/2018 - 09:09 Permalink

You forget that pain can come in many forms.

 

If, I say IF you have even dealt with a Chinese company or person, and YOU criticize or otherwise express displeasure with, they will NEVER forgive you.  Unlike Americans who generally have a three day memory, the Chinese memory lasts for decades.

Just like the Russians, we Americans do not understand the Chinese mind...we just imagine we do, and look at all the trouble we are always getting into because of that childish ignorance.

In reply to by beemasters

halcyon Pearson365 Sat, 04/07/2018 - 00:44 Permalink

pearson365, you do understand that under the mercantilist system (btw takes more than 1 to do it), the country which cannot price compete, runs out of gold, starts printing paper IOUs and when that is not enough, it antes up on mercantilistic trade tariffs further blocking remaining free trade.

Now, which country is in this position?

Also, once you take away the printed paper's worth, what happens to the money printing colonies that have run out of real wealth?

 

In reply to by Pearson365

beemasters Zero Point Fri, 04/06/2018 - 18:35 Permalink

If you think the tariffs will get the citizens richer and politicians poorer, you will be in for a shock. Don't believe what politicians tell you (gosh, must I tell you this???). Corporations, politicians will benefit and the people will always lose. You don't get to dictate the rules and policies. They do.

We should ask Trump: What will you do with the collected tariffs you are taking from the pockets of the American people? If it's going to the military elites and subcontractors again, FU!

In reply to by Zero Point

JuliaS Zero Point Fri, 04/06/2018 - 23:52 Permalink

Tariffs are a way of manipulating the market. If you're a politician, you know ahead of time which things will go up in price, you pass a word to your friends, so they could stock up either on physical product, futures, or maybe set up short positions against companies you know will suffer when input costs rise.

I bet there's going to be a lot more congress millionaires after this trade war.

It's all bullshit. Nobody cares about us. Politicians are stuffing their pockets by inventing rules and charging a premium on movement of goods that they do not produce.

Fuck both sides.

In reply to by Zero Point

Rubicon727 beemasters Fri, 04/06/2018 - 18:17 Permalink

"All options on both sides are lose-lose. The only way is to talk and negotiate a better deal with China."

 

I don't think you understand. Like all empires that fall, China has grown powerful and is intent on destroying America's hegemonic state 'round the world. This is what always happens - a contender grows in power against a hegemony. Because the US elites have stolen from others for decades, including about 80% of the US population, they've become the most hated and belligerant nation on earth. 

It's highly doubtful that any economic negotiations will transpire between the two nations. It's even more doubtful that American banksters, corporations, the military establishment will acquiesce to China's requisite needs. Meaning, we'll all be destroyed in the process.

Wake up and smell the roses.

In reply to by beemasters

holy_crane Zero Point Sat, 04/07/2018 - 15:00 Permalink

NOPE. Mao didn't kill his people en masse. Mao did not build the new republic from ashes just to decimate his own countrymen. The Cold War was at its peak around the time Mao Zedong launched his quick and failed industrialization initiative, the Great Leap Forward. The new and weak republic was being sandwiched between the two Cold War protagonists: USA and USSR. Remember it's at the height of the Cold War, conditions were very fluid, external existential threats were imminent. Some names in the USA (forget the names, don't bother to search) even threatened to destroy China using thermonuclear weapons, it's all documented in history, one can search the declassified files in the USA, Krushchev was the head of USSR at that time. The propaganda machine was at its loudest, deafening volume. Mao was criminalized for some crimes he didn't do. The Chinese people do understand this situation, the efforts to stigmatize Mao was just a cheap propaganda circulated during that era. That's why until now Mao's faces are still printed on all Chinese currency notes. His mausoleum is still well preserved, and thousands over thousands of Chinese people visit it on each opening day, until today!

Read it here to find the better truth.

Did Millions Die in the Great Leap Forward: A Quick Note on the Underlying Statistics
https://blog.hiddenharmonies.org/2013/02/02/did-millions-die-in-the-gre…

In reply to by Zero Point

OZZIDOWNUNDER Snout the First Fri, 04/06/2018 - 23:26 Permalink

@ Snout  "-if you are concerned about the killing of innocents around the world, then "you ain't seen nuthing yet" until China becomes the dominant power. If they would do Tiananmen Square to their own people, what do you suppose they will do to "Barbarians"? "

You're obviously an uneducated patriot with a thimble for a brain. Just do a Google to see what the USA state has done over the Years to Protesters. It aint pretty & as things progress from here you'll see & feel the full brunt of your Govt bruitishness.

In reply to by Snout the First

Dr. Bonzo beemasters Fri, 04/06/2018 - 23:46 Permalink

If the people can't stop it, let's hope another nation can.

The biggest crime in forum debates is everyone's sense of entitlement to their opinions. Even if their opinions are completely fucktarded and contrary to all known facts and evidence.

I don't think there are many here who aren't opposed to the US military "killing innocents" but to assume somehow that the Chinese are benevolent teddy bears is so hideously at odds with reality it's beyond offensive.

And you casually ignore the underlying assumptions that allow you to get away with your ignorant bullshit. How do you know about the US military "killing innocents" in the first place? Why don't you know about the abject slaughter the Chinese wrought against their own population for nearly 40 years?

You don't even understand exactly how the Chinese managed to engineer their way out of being a backward agrarian shithole into a dystopian wasteland in less than 20 years. THIS is the plight that awaits all humanity.

But you fucking fanboys keep cheering for these totalitarian shitbirds and their hellbent obsession with putting their boot on your neck too. And worse.

In reply to by beemasters

InnVestuhrr beemasters Sat, 04/07/2018 - 00:31 Permalink

You are either an Olympic Class moron or a shill for the Maoists, or both. Mao and his regime lords, who are revered and worshiped by the current crop of Maoist regime lords, tortured and murdered millions of Chinese, AND killed thousands of allied soldiers in North Korea in the 1950's who were enforcing the UN mandate for the unification of Korea under a democratic government instead of a communist dictatorship.

If I had the power, I would take all the scumbags like you who defend and glorify ruthless freedom-crushing dictatorships like the Maoists, and do to you what they have always been doing to those who oppose their tyranny, ie if you like them so much,then you should get what they give out.

In reply to by beemasters

beemasters InnVestuhrr Sat, 04/07/2018 - 05:38 Permalink

No, you are wrong. How is being critical of Trump's tariff (tax) on American people a Maoist shill? Your logic is incredible. I don't defend violent or abusive people/regime on all sides...that includes you.

"The mainstream media deflects attention from where power resides: corporations, not with the leaders of the free world. The arguments posed by Chris Hedges, that the U.S. is neither a democracy nor a republic but a totalitarian state that can now assassinate its citizens at will, are pertinent ones. Scary ones. Especially as consecutive governments seem equally as impotent to invoke any real change for the States. If the media won’t stand up to the marionettes who pull the strings of the conglomerates causing deep, indelible polarization in the world abound; then so we must act. Together."
https://www.zerohedge.com/news/2018-04-07/chris-hedges-us-citizens-are-…

In reply to by InnVestuhrr

txwylie Rubicon727 Sat, 04/07/2018 - 12:15 Permalink

There are only 3 ways China could actually hurt the US. One, sell all the bonds and force the Fed to buy them (collapsing the dollar); two, buy and take delivery of physical silver on the COMEX collapsing the alleged market fixing by JP Morgan which in turn would lead to bank closures and a derivatives crisis, and three, coordinating with Russia to nuke the US. All three would cause damage to China also so really China has no real options. Trump checkmate.

In reply to by Rubicon727