There are all sort of article around this morning about the next moves that China might make in the so-called “trade war” with the United States, most of them self-destructive which IMO is why China won’t do them. Niall Ferguson warns of a new Thirty Years War. IMO we’ve been in a new Thirty Years War since the Iranian Revolution but nobody has noticed that’s what it is. What else would you call a war without borders and without end?
You might want to glance at this piece at Bloomberg by David Fickling which explains why blocking exports of rare earths to the U. S. is just about the dumbest thing that the Chinese might do:
As is often pointed out, most rare earths aren’t in fact rare. Lanthanum and cerium are as abundant as copper and lead, and are used in such pedestrian applications as pool cleaner and cigarette-lighter flints. Even the more prized magnetic elements such as neodymium, dysprosium, praseodymium and samarium are humdrum enough that Apple Inc. uses rare-earth magnets to make its power cables stick in place. Pottery enthusiasts can pick up neodymium oxide for around $50 a kilogram online to give a blue tint to their glazes; that’s probably a bit more neodymium than you’d find in a typical electric car.
Supply is particularly generous when you set it against the most crucial and alarming segment of demand: military hardware. This amounts to no more than around 500 metric tons a year, according to a U.S. Department of Defense study, equivalent to what you’d get from Lynas’s plant in about 10 days. Solvay SA, a French chemicals company, recently set up a demonstration project to produce nearly 200 tons a year of rare earths just from recycling light bulbs.
In hindsight, the U.S. government might have been wise earlier this decade to provide the loan guarantees to put Mountain Pass on a more solid footing.
It might be worthwhile to consider why the Department of Energy demurred from guaranteeing Molycorp’s loans. It was mostly the Obama Administration’s environmental concerns.
The only dumber thing the Chinese might do would be to dump Treasuries, something that would remind me of nothing so much as that scene in Blazing Saddles in which Cleavon Little held a gun to his own head.
One should not discount the Chinese government doing self destructive things.
Having issued the threat domestically; it would lose face if it does not follow through on an US escalation (ie the next set of tariffs). For the CCP; being exposed as a paper tiger to its own people … would open pandora’s box.
I’ve written about why China needs dollars in the past and for those reasons I think that China’s dumping its Treasuries is extremely unlikely. Based on previous experience the Chinese authorities already know what would happen if they blocked rare earth sales to the U. S.—doing business with China would be seen as too risky a proposition to continue and that wouldn’t just be true here but everywhere.
I can see the CCP doing something self-destructive but it’s hard for me to rationalize its doing something that only has costs.
I and others have said that the Chinese are playing a weak hand well while the U. S. is playing a strong hand poorly. IMO what we’re seeing is just how weak China’s hand actually is.
All of foregoing to explain why I think we’ll see tit-for-tat tariff increases for the foreseeable future rather than other measures. The U. S. has plenty of additional moves it could make.
An indication of monetary concerns in China might be a recent move by the Bank of China seizing control over one small city commercial lender for a year. This is the first of such take-overs to have occurred.
For anybody interested in why China dumping Treasuries is a dumb idea:
China Cannot Weaponize Its U.S. Treasury Bonds
Up until now, I have skipped over articles by Michael Pettis, but I think he will be my new Jeffrey Snider. Anybody interested in income inequality and/or the trade deficit should read:
Should the United States Run a Trade Surplus?
This is the key passage:
I find Michael Pettis and Patrick Chovanec always worth reading. They’re well-informed and reasonable.
WRT the second article, that’s also the reason that the Germans should be investing in the Greek economy rather than browbeating them about their profligacy. Greece is capital-poor as practically every post-colonial country is.
“I and others have said that the Chinese are playing a weak hand well while the U. S. is playing a strong hand poorly. IMO what we’re seeing is just how weak China’s hand actually is.”
Exactly! I have been fairly quiet on tariffs. I think the tin general they dont work very well, but in specific situations could help. I just dont have any confidence that the people in charge now will be able to form a comprehensive plan and stay with it. The guy in charge is too impulsive and ill-informed.
Steve
There are tools other than tariffs that the U. S. could employ. I don’t know whether to attribute the IMO overemphasis on tariffs to Trump, his advisors, or some of both. Some of the tools are the trade equivalent of nuclear weapons.
I’m also amused by the sudden realization on the part of the media about how tariffs work. They work by raising the prices retailers and consumers pay for Chinese goods. Hasn’t that always been obvious? That increases the risk of including Chinese-made components in your supply chain. Short term tariffs could create long term problems for the Chinese as, for example, Apple realizes the cost of using Foxconn’s Chinese factories as their primary (or only) supplier of iPhones.
@Dave Schuler
… Patrick Chovanec …
Please, do not throw out new people. It took me 2+ years to get through much of Jeffrey Snider’s work, and Michael Pettis is probably going to take a while to get through. Now, you are introducing another person, and I just got my Skyrim setup finalized.
I haven’t touched Skyrim in a while after playing it all the way through a half dozen times. Maybe I should go back to it. I’m playing Pillars of Eternity 2: Deadfire now.
I play a heavily modded version, and I finally got everything stable. My hands do not work well enough for intense combat, and I am mostly playing for the story. I ran across NieR: Automata, and I may pick it up when it goes on sale, but with my hands, I am not sure if I will be able to play.
“Hasn’t that always been obvious?”
No. Trump told them this means we collect more money from the Chinese. His supporters believe that if we impose $200 billion in tariffs we collect $200 billion from the Chinese. Saying other wise is fake news.
I couldn’t do PvP anymore, partially because the hands were slower and stiffer, but mostly because of the eyes. Loved gaming though, so if I could find something that was close to the fun of PvP would consider trying it.
Steve
That’s not the way tariffs work.
Witcher 3 is probably the best fantasy role-playing game ever developed. Skyrim essentially created an entirely new genre. It’s not just a game; it’s a way of life. Pillars of Eternity and Pillars of Eternity 2 are old style isometric games with 2D backdrops.
TastyBits:
The Dawnguard DLC for Skyrim gave me quite a shock. Random vampire attacks have the ability to kill off characters required to complete some quests and these attacks increase in frequency the longer you delay pursuing the Dawnguard storyline. That puts you in the position of pursuing the Dawnguard storyline before you’re really strong enough to do it or gambling that the characters you need to finish some quests are still around when you’re ready for them.
Re : Playing a strong hand poorly. At least Trump is playing, the previous 3 administrations folded before the cards were dealt. And before the last 6 months, there was no support in policy circles outside the administration to go and play.
Re tariffs — reading from industry press like digitimes tells a nuanced story. Goods which have perfect substitutes not effected by tariffs (same price, quality), the exporter either eats the cost of the tariff, moves production out, or loses their business. Goods that have 0 substitute (cannot be produced anywhere else), the consumer pays the tariff.
In reality most things are in between, and US has been prioritizing things that can be substituted. The results so far look like (a) exporters are paying a share of the tariffs by discounting goods; (b) some production moves out of China, and (c) consumers paying costs.
@Dave Schuler
I did not intend to hijack the thread. I was just being a wiseass, but I did not think there would be much traffic. I could do a rant about the monetary system to get things back on topic..
With mods, you can stop the vampire attacks (in cities and towns), or you can protect the people from being killed. I am replaying Witcher 3. I think the combat was better in Witcher 2, but my hands worked better back then.
I play GTAV online, but there are way to many griefers. Unless you fork over real dollars, the grinding does suck. Using assisted-aim, I do alright against the NPCs, but I do not even bother engaging with the other players.