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Does China Have A Trade War Wild Card Left To Play?

Does China Have A Trade War Wild Card Left To Play?
Image by Brücke-Osteuropa
Rare earth from Baotou, Geology exhibition in Hohhot, Inner Mongolia, China

The long trade war of attrition between the U.S. and China continues to drag on, with Beijing in the past week or two taking a more defiant tone. Despite being called on the carpet for obvious trade war irregularities and consistent WTO violations, Beijing, in arguably one of the most disingenuous statements from a major country in recent history, has accused Washington of starting the trade war. However, facts speak louder than words and not only is the U.S. calling China on the carpet for what has to be called obvious trade cheating, using academics and workers in the U.S. to spy and steal corporate trade secrets, state support for industries that give an unfair competitive edge, making entry into its markets for foreign companies difficult, and a host of other illegal trade actions, the EU is also laying claim to many of the same allegations against Beijing. 

As Beijing digs in its heals agasint the Trump administration and the president’s unflinching push to level the trade playing field, the question at the end of the day is who will blink first? Trump is hoping that he can outlast China since the U.S. imports around five times more Chinese goods than China imports from the U.S. Some analysts agree with this assertion, while others debunk it as an oversimplification. Noted economist Gary Shilling, for his part, sees the U.S. as having the upper hand. He stated that not only will President Trump win the seemingly endless trade war with China, but in the long run, the U.S. will be better off.

“People say nobody wins trade wars. Yeah, in the short-run you don’t, but in the long-run…the U.S. will be better off,” Shilling recently said. “When you’ve got plenty of supply in the world, and I think you do. It’s the buyer that has the upper hand not the seller. The buyer has the ultimate power and who’s the buyer? The U.S. is the buyer, China is the seller,” he said. Other agree, claiming that without the vast U.S. market, China will have trouble finding buyers for many of its consumer products.

Does China have a wild card left to play?

Though Shilling’s assessment of the trade situation seems plausible, China could still have a wild card or two left to play if the U.S. continues on its current trade war path. For one, China could try to inflict pain on the U.S. by withholding rare earth materials. China, the world’s biggest rare earths producer, supplies about 80% of U.S. rare earth imports, which are used in numerous  applications including smart-phone devices, electric vehicles, wind turbines and even military hardware and weapon systems. Moreover,  most of the rare earths mined outside China still end up there for processing. Even the sole U.S. rare earths mine at Mountain Pass, California sends its material to China.

China is already creating a negative impact on U.S. LNG (liquefied natural gas) project development due to the trade war. Beijing’s move to hike tariffs on U.S. LNG from 10% to 25% will cause a number of greenfield (new) LNG project proposals to not go forward. These projects, unlike their project proposal counterparts that are funded by oil and gas majors with deep pockets, will not be able to strike long term off-take agreements needed to reach the all-important final investment decision (FID) before a project can be built. Moreover, many of these smaller projects which are often being promulgated by a patchwork of various companies and energy players will also need Chinese financing to go forward. The reality that China is now the second largest LNG buyer in the world and will likely pass Japan, the top current LNG buyer, in a number of years is a hard reality for the U.S. LNG sector to deal with as it seeks to compete with both Australia and Qatar as the top LNG export leader by the mid part of the next decade.

On the other hand, there will be more LNG demand in the mid to long-term coming from Europe, as many EU members,try to pivot away from replying on geopolitically charged Russian pipeline gas, as well as in South Asia, Bangladesh, Pakistan and Sri Lanka, and Southeast Asia, Thailand, the Philippines and Vietnam, that can help offset the lost of the Chinese markets if the trade war persists.

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1 comment

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Sam J. June 8, 2019 at 2:14 pm

They keeping rare earths will only force us to open our mines and process ourselves. We have LOTS of rare earths it’s usually in combination with thorium and the EPA is calling it nuclear waste. We could just gather it up and place it in the nuclear depository. I hope they do hold rare earths back. It will be great for our mining industry.

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