Posted on 05/29/2019 8:59:01 AM PDT by SeekAndFind
From the volume of bellicose rhetoric in China’s state media, you might think Beijing is digging in for a bloody fight to the finish in its trade conflict with the United States.
But after the US administration this month jacked up import tariffs on US$200 billion of Chinese goods to 25 per cent, and threatened equal tariffs on another US$340 billion, the Chinese government faces a problem. The policy responses it is considering are all either impossible, impractical, ineffective or expensive. This leaves Beijing in an unenviable position.
The usual trade-war response to the imposition of tariffs is to impose countervailing tariffs of your own, inflicting enough pain on your antagonist to bring him back to the negotiating table.
But that’s impossible in the US-China dispute. Yes, last week the Chinese government slapped 25 per cent tariffs on US$60 billion of imports from the US. But that just highlights Beijing’s problem.
Last year, the US imported US$540 billion of stuff from China, whereas China bought just US$155 billion from the US (or maybe as much as US$180 billion, if you include all the US goods shipped to Hong Kong).
So, if the US imposes 25 per cent tariffs on everything it buys from China, and China retaliates by doing the same, its retaliation will be ineffective in comparison.
Worse, many of those imports from the US, advanced semiconductors for example, are important for China’s economic growth, so imposing tariffs on the US would hurt back home. And if Beijing tried to relieve the pain by paying subsidies to injured importers, it would defeat the object of imposing tariffs in the first place.
Aware that countervailing tariffs are not an option, many Chinese commentators have suggested Beijing could punish Washington by “dumping” its holdings of US Treasury bonds.
(Excerpt) Read more at scmp.com ...
Here are China’s retaliatory options, not one of them can be done without them shooting themselves in the foot:
1) Increase tariffs on US goods even more than they already have
2) Dump US Treasuries that they hold ($1.1 trillion )
3) Stimulate China’s domestic economy by expanding credit growth, and then not to stand in the way when the yuan weakened in response to the looser monetary conditions.
4) Weaponize China’s rare earth dominance which are a crucial component in the US Tech sector.
5) Return to the 150-page outline trade deal with the US which it rejected.
Can you think of any other options?
invade North Korea. Expand the market there.
I can only give them some advice from one of our great philosophers:
"You got to know when to hold 'em
Know when to fold 'em
Know when to walk away
Know when to run"
So the upshot is this. This is the time to fold 'em. Quietly, without fanfare, no complaining, just fold 'em. You're dealing with adults now.
6) Increased support for Iran & North Korea.
7) Invade Taiwan.
Mueller’s little show today is giving the Chinese less motivation to enter into a trade deal with Trump now.
You say:
4) Weaponize China’s rare earth dominance which are a crucial component in the US Tech sector.
Japan has just announced this month the discovery of the world’s largest resource of rare earths.
The math is so simple even a democrat should be able to understand it. Many of us have been saying all along Trump has the upper hand, he just has to wait it out.
If Xi threatens to restrict rare earth exports, we’ll just have to do without EVs and some types of wind turbines for a while. Where does he think the electric motor used in the Toyota Prius is made, anyway?
And it would provide the best possible incentive to develop REE extraction methods that would totally eliminate our dependence on China. We have plenty of rare earth metals, it’s just the cost of extraction that gives China the edge.
The smart thing to do would be for China to sign a free trade pact with the US announcing that this would be good for both countries.
Japan has just announced this month the discovery of the world’s largest resource of rare earths.
Ka-ching, Beijing.
Heh, and Trump is in Japan ;-)
Trump has a one-time-only opportunity to break China, then to sit down with Xi and find a way for him to save face. That will be the ultimate art of the deal.
The Chinese are doing #3 to some extent. The yuan has been devalued versus the dollar by about 2.7%, since Trump announced the increase in tariffs on May 5. It will be interesting to see if the Chinese let the exchange rate go past 7 yuans to the dollar, a level they prevented from being breached toward the end of 2018.
The issue isn't finding rare earths. They're not really rare at all. It's refining them, which creates huge amounts of toxic wastewater.
If the Yuan is in danger of breaching 7, guess what will happen... they will have to stem capital outflows ( who is going to keep their currency in Yuan if this currency is devaluing?).
And then there is Xi Jin Ping’s long term goal of making the Yuan and international currency to rival the USD and the Euro, how’s that going to attract buyers to the Yuan?
2) Dump US Treasuries that they hold ($1.1 trillion).
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There’s a saying, “If you owe the bank $100,000, you have a problem.”
“If you owe the bank $100 million, the bank has a problem.”
Or, in this case, $1.1 trillion.
“Japan has just announced this month the discovery of the world’s largest resource of rare earths.”
The article about this, which was recently posted on Free Republic, was from a year ago.
There is a long lead time between discovering a deposit, and having regular deliveries of refined product. The Japanese deposit is deep underwater.
The rare earth threat from China is more one of a year long supply disruption, rather than a long term monopoly of theirs. Mines in the USA could be restarted, if prices made it worthwhile.
“Dump US Treasuries”
The article really shoots that down as an option.
1. China holds less than 5% of the outstanding Treasuries. The market will easily absorb them if they sell slowly, and the Fed can easily absorb them if they sell quickly. The Fed bought more than that in a few weeks in 2008.
2. What could they do with a trillion dollars in cash, if they sold their treasuries? Put it in a bank, which would then buy Treasuries with most of it (paying the Chinese a lower interest rate)? They don’t have a better option for their dollar reserves, and trying to get out of the dollar would tank their currency.
Bottom Line: It would not be an effective lever for them.
Interesting and informative.
Thank-you for posting.
So, if all the options are bad, what’s preventing them from going back to the table and negotiating a trade deal that is mutually satisfactory?
I have on word in mind -— PRIDE !
“what’s preventing them from going back to the table and negotiating a trade deal that is mutually satisfactory?”
The current situation is based on a dramatically one-sided set-up, where China rips us off wholesale.
A mutually satisfactory deal is impossible, because one that is fair to the USA, would be a huge loss to China.
The Chinese communists don’t want fair trade, and never have. THey just want to take our stuff, and take over.
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