US Trade Policy: Not Only Are We Stupid, We Are Hypocrites

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Posted: Aug 02, 2018 11:34 AM
US Trade Policy: Not Only Are We Stupid, We Are Hypocrites

The news agencies reported Trump would extend tariffs on Wednesday. Instead, we have an outline of possible actions.

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

  1. Let the Yuan slide 25% negating the tariffs.
  2. Further limit US firms ability to do deals in China
  3. 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:

 

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 subsides 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