Will Trump Trigger a Trade War?

Written by Gerardo Del Real
Posted February 9, 2017

Even before Donald Trump took office, the message to U.S. companies looking to build or expand outside of the U.S. was very clear... do so with the understanding that you will pay in taxes what you'll gain in reduced labor costs and increased productivity.

Legalities aside, Mr. Trump has told business executives that he would punish companies that shut factories in the U.S. and moved jobs overseas. The punishment would come in the form of a "very major" border tax.

The comments were made on the same day he withdrew from the Trans-Pacific Partnership. The agreement was negotiated with 11 countries, including Australia, Japan, and Vietnam, but Congress never ratified it.

Although the withdrawal was supported by members of both major parties Trump didn't stop there.

He's also threatened to renegotiate the North American Free Trade Agreement with Canada and Mexico.Mexican President Pena Nieto recently cancelled his visit with Trump over Twitter comments... Twitter comments.

Let me be clear, if a border tax is imposed it will not be imposed without retaliation. Mr. Trump told a German newspaper that BMW might have to pay a 35% border tax on cars imported from a new factory in Mexico.

Not because BMW wanted to move jobs out of the U.S. but simply because it wanted to move jobs from Germany, China, and South Africa to Mexico.

And then there's China.

Trump has said he would slap tariffs as high as 35% on certain Chinese goods. China is a member of the World Trade Organization and would likely retaliate against unfair trade practices by the new U.S. government.

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What is unclear is whether the U.S. under Trump would adhere to WTO rulings on trade disputes

Another concern is a Trump spokesman recently said the United States would prevent China from accessing islands it claimed in the South China Sea, a threat that one nationalist Chinese newspaper had already warned would mean war.

At the World Economic Forum in Davos, Switzerland, held earlier this year, President Xi Jinping suggested that while the United States is willing to step away, China was prepared to step up as a champion of free trade and protector of the global environment.

Take a moment and let that sink in. A more recent quote out of China by China's Foreign Minister Wang Yi said the United States "needs to brush up on its history about the South China Sea, as World War Two-related agreements mandated that all Chinese territories taken by Japan had to be returned to China."

China is moving ahead with an agreement of its own: The Regional Comprehensive Economic Partnership.

That agreement would exclude the U.S. and would reduce or eliminate tariffs on trade among China, Southeast Asian nations, Japan, Australia, India, Japan, South Korea, and New Zealand.

It includes few of the features of the TPP that Beijing was most opposed to, such as protections for independent labor unions and the environment, and requirements that state-owned enterprises behave more like commercial enterprises.

The Deccan Herald recently explained how fragile the current situation is:

Trump's trade officials have threatened to impose high tariffs on Chinese goods, starting with heavily subsidized products such as steel and aluminum, imported into the United States. "It's a little weird that we have very low tariffs and China has very high tariffs, "Wilbur Ross, the nominee for commerce secretary said at his Senate confirmation hearing last week.

Last week, China proposed allowing greater foreign investment in certain sectors, but there was little confidence the recommendations would be carried out in the foreseeable future, and American businesses said they felt less welcome in China than before.

While Trump's advisers say that China has more to lose than the United States in a trade war, Chinese officials told visiting American businessmen last week that Beijing was prepared. They had developed lists of punitive options they would take against the United States if Washington took the initiative, they said.

The signals are very clear: If this is going to be a trade war, China will reduce imports of American aircraft from Boeing and agricultural products," said Wu Xinbo, director of American Studies at Fudan University in Shanghai. "We can turn to Europe, Australia and Canada for those products. And we know that 20 to 30 of the states in the United States with big agricultural lobbies and Boeing plants will be putting pressure on Congress."

A long-serving US trade expert in China agreed, saying China was prepared to go to the mat. "Trump's trade team would be wise to shelve "The Art of the Deal" and focus on the "Art of War" if they really want to know what's ahead in US-China trade relations," said James Zimmerman, a managing partner of the Beijing office of the law firm Sheppard, Mullin, Richter & Hampton who has worked in China for 19 years.

In the end a trade war would be harmful to all countries involved.

In the case of China, it could also leverage its significant influence in the critical metals space.

The United States heavily relies on China's 95% dominance of the REE market for economic prosperity and to conduct global security and naval operations.

If China decided tomorrow to embargo these elements how long would America continue to prosper and meet its operational needs?

China Flag on Rare Earths

What would America's response be, and how effective would that response be given the compromised supply of REEs?

How would production continue on the F-35, Tomahawk cruise missile, surveillance and communications satellites, or the new hybrid propulsion drive on the Zumwalt-class destroyers?

These are all situatuions that I'll be keeping an eye on and part of the reason one of the Resource Stock Digest Premium core holdings is a company that is in a unique position to provide exposure to many of the strategic metals that are critical to a diversified supply chain outside of China.

China has proven itself willing to cut off supplies of REEs to the West before, and this time will be no different. That could easily transform this company from a profitable investment into a critical and strategic resource for all of our technologies, consumer AND military.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Resource Stock Digest Premium and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Resource Stock Digest Premium, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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