Deal with China
Welcome to MktContext! I am a professional money manager, trader, and investor who has been timing and beating the market for over a decade. We specialize in predicting market direction by studying the economy and market signals. Join 10,000 subscribers at MktContext.com in improving your portfolio returns — it’s free!
A few weeks ago, tensions between US and China escalated again, with particular focus on rare earth minerals and technology transfers. This week, a deal was struck to de-escalate tensions. Rare earths will continue flowing across borders, tariffs on China will be dialed down a notch, and tech restrictions will ease.
The 100% tariffs raised by Trump a few weeks ago, will be withdrawn.
The rare earth restrictions raised by China a few weeks ago, will be delayed.
See how this works?
Regardless, we think this is only an uneasy truce. Both countries are more keen on their own national interests than on full trade resumption. The US sees China as a militaristic threat, and needs to restrict key technology while reducing supply chain reliance. Meanwhile, China wants to disentangle from the US Dollar system, catch up in semiconductors and software, and secure food for themselves. This fight has nothing to do with tariffs/trade in and of itself.
Below is China’s imports of soybeans (a key food source for the entire country, since it does not produce its own). The blue line shows they drastically cut purchases from the US during Trump’s first term in 2018. Relying on an “enemy” for the nation’s food supply is untenable for China. So when Trump accused China last week of not buying US soybeans, understand that these are questions of national security:
At present, the US is fully reliant on China for rare earths and cannot dissociate from them. Despite a huge push to build new mines, secure allied supplies, and build stockpiles, the US won’t be self-sufficient for at least another decade. And as we said before, a loss of rare earths can bring US manufacturing to its knees.
With that context, it’s no wonder Trump responded so aggressively to China’s mineral restrictions. It’s a game of chicken, and a reminder that the US and China need each other equally… for now. This latest truce can only last until one side weans itself off the other.
Regardless, US and Asian stock markets surged on the news. This may be enough for China stocks to finally break out of this multi-year range, as the specter of punitive tariffs is lifted:
In other trade news, Trump signed trade pacts with Malaysia, Thailand, Vietnam, and Cambodia. By contrast, Trump announced a 10% additional tariff on Canada in response to an anti-tariff ad released by the Province of Ontario. It’s a reminder that trade uncertainty is not yet behind us and can flare up at any moment.
To read the rest of this article, and to see our portfolios and get more market timing content, head over to MktContext.com and subscribe today!
