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:
- 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.
- 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.
- 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
- 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.
Will America Accept Its Defeat in Syria? Challenge Russia and China?
Russia introduced China to Syria during the war when the Chinese navy arrived in the Mediterranean and reached the shores of Tartous and Lattakia to send a message to America and its allies that the monolithic dominance of the world was over.
There are thousands of Chinese jihadists who fought with ISIS and al-Qaeda and Beijing was concerned, willing to see all these killed in Syria. Cooperation between the Chinese and the Syrian intelligence services was established. Damascus has a unique and a very rich bank of information about foreign fighters many countries in the world would like to have access to, since over 80 nationalities of foreign fighters were allowed into Syria in a failed attempt to topple the regime and establish an Islamic State.
But Washington is still trying to protect its position, refusing to give up on the crown of world domination it has enjoyed for over a decade and it is ready to fight against the “axis opposing the US” using other means outside Syria. The US establishment and its allies are expelling Russian diplomats and imposing sanctions on China and Iran. The US defeat in Syria is obviously very painful.
What Washington is pretending to ignore is that the world no longer believes in the US’s military muscles and that there are two potential countries, less arrogant and willing to create alliances rather than bullying weaker countries: Russia and China. These are gathering more allies against the US axis.
The US is still living in the era of 1991 when the Soviet Union collapsed. Its strong decline continued until the arrival of President Vladimir Putin to power in 2000. Washington realised there is a new person at the Kremlin in the castle of the Tsars with a determined intention to restore the lost glory. Russia had only nuclear weapons at that time and nothing else but the will was strong for the Russian bear to wakeup from its hibernation.
Putin did not declare war on America but extended his hand and tried to build friendship or at least not enmity. But Washington saw in Moscow the potentiality to recover in a couple of decades and worked on slowing down the process or interrupting it if possible. This is why the US started to pull to its side many countries of the ex-Soviet Union which have declared independence and include these in NATO and in the European Union surrounding Russia.
China, which includes cheap labor and can clone any commercial or military technology, like Russia has perceived America’s fear of its rapid economic development and wealth. Thus, the Chinese-Russian rapprochement was mainly created by the aggressive US policy towards the two countries, and this mainly because the American concentrate exclusively on military muscle when dealing with the World.
Washington has focused its naval control over the South China Sea and the Straits of Malacca, bringing back memories of its military presence during the Second World War with the attempt to tighten its pressure on Beijing. The US is aware of their naval superiority and know that China needs the sea for its commerce and for its supply of energy.
China started to protect itself by setting up the Eurasian political and economic Shanghai Cooperation Organisation in June 2001 with the goal also to focus on economic initiatives, increase military and counter terrorism cooperation with intelligence sharing. This Cooperation includes about half of the World’s total population and the states (including five nuclear states) of China, Russia, Kazakhstan, Tajikistan, Uzbekistan, Kyrgyzstan, Mongolia, Iran, India and Pakistan – and rejected Washington’s and Tokyo’s request to be observers only.
China has gone to the countries affected by US policy to establish a rapprochement. Further, it established the “string of Pearls” of states and islands for marine protection and encircled India, Japan and other American allies. The Indian Ocean sees the passage of 60% of the trade in oil from the Middle East, making the Straits of Malacca indispensable for China to protect. Therefore Beijing established relationships with Malaysia, Singapore, Myanmar, Coco islands, Bangladesh, Sri Lanka, Pakistan, and a presence in the African coast in Sudan and Kenya.
Moreover, China revived the world’s oldest overland trade route of the Han Dynasty called “the Silk Road”. The modern Chinese Silk Road will provided a link to Beijing with the world for trade expected worth one trillion dollars (for 900 separate projects). The Silk Road reaches 11 cities in Europe and others in Africa by railway and pipeline and is expected to bring together seven Asian countries under the slogan “One Belt, One Way”. It will offer gas and trade to China and will cover 70% of the planet’s population.
China is also part of the BRICS Group, which was established in 2009 and includes Brazil, Russia, India, China and South Africa, which account for about 40 percent of world production.
And last but not least, in 2013, China presented the Asian World Bank (AIIB) that was set up to strike America at the core and bring together 57 countries – including several European states – but excluding the United States and Japan, its staunch ally.
The Asian International Bank – with $100 billion – aims to get rid of American financial control over the world’s economy. Washington considered this move as provocative, aiming at finding alternatives to its control of the world’s economy and financial that the United States has controlled for decades without any rival.
With its superficial but continuous sanctions, Washington believes it is capable of preventing the Eurasia Union (which begins from the Atlantic Ocean to the Indian Ocean, including six large states containing 3/4 of the world’s energy), to trouble Russia and to bother China.
Moreover, the US was thinking of creating a “Middle Eastern NATO” to counter the “Shiite crescent” and the “Iranian threat”. This idea was destroyed following the Saudi Arabia disastrous war on Yemen and because Middle Eastern countries are unable to unite politically, economically or militarily.
While the US is fighting and losing in Syria, most countries that rejected American hegemony are gathering together in one way or another. There is cooperation between these countries – as we saw above – to get rid of Washington’s dominance, arrogance and destructive foreign policy.
The US believes in changing regimes and directly – or through proxies – to occupy or control countries and impose a heavy protection fee to avoid toppling Middle Eastern monarchies (like Saudi Arabia as Donald Trump said himself). The US establishment is also manipulating youth and exploiting it under the title “Freedom activists” to guide them towards failing states, allowing extremists (Libya and both Syria and Iraq) to just get away with it).
America is deploying missiles everywhere where its military bases are deployed all over the world and has never thought of using its energy and power to support the economy and peace. It is only focused on controlling states and the sources of energy regardless of the consequences, because there is no accountability for its doing.
Failure is everywhere: Washington’s plan failed- as General Wesley Clark, retired 4-star U.S. Army general, Supreme Allied Commander of NATO during the 1999 War on Yugoslavia said – to occupy seven countries (Iran, Iraq, Syria, Lebanon, Libya, Somalia and Sudan), and its failure in Afghanistan, Iraq and Syria because it underestimated the reaction to its foreign policy.
However, it has largely succeeded in planting hate among the Muslim population, turning the objective of al-Qaeda (its goal to target the far enemy, i.e. the US) and replaced it with ISIS (the goal is to target the near enemy, i.e. minorities and other Muslims), reviving an animosity between Muslims that is 1400 years old. Today the majority of the western population believes the war in the Middle East is “between Muslims. Let them kill each other…who cares?”.
While the United States is selling for $110 billions weapons to Saudi Arabia to kill more Yemenis and threaten its neighbours (Qatar, Syria and Iran), Russia has signed 10 year contracts with China worth 600 billion dollars, and with Iran worth 400 billion dollars. Also, China has signed contracts with Iran worth 400 billion dollars. These contracts are aimed at economic cooperation, energy exchange; they promise an advanced economic future for these countries away from US dominance.
The US believes it can corner Russia, China and Iran: Russia has a 7,000 kilometre border with China, Iran is not Iraq and Syria is not Afghanistan. In Syria, the destiny of a world to be ruled by unilateralism is over. The world is heading toward pluralism.
The question remains: Is Washington prepared to accept its defeat and acknowledge that it has lost control of the world and pull out of Syria?
Elijah J. Magnier is a Senior Political Risk Analyst with over 32 years’ experience covering Europe & the Middle East. Acquiring in-depth experience, robust contacts and political knowledge in Iran, Iraq, Lebanon, Libya, Sudan and Syria. Specialized in political assessments, strategic planning and thorough insight in political networks.
Proof read by: Maurice Brasher