China Can Hit The U.S. Far Harder Than Anyone Thinks

Written by Adam English
Posted September 4, 2018 at 5:21PM

The $200 billion in possible new tariffs against Chinese imports will dominate the news this week, but one aspect won’t get covered.

There will be talk about how China is limited in its capacity to retaliate.

This is true on an "apples to apples" basis. After all, the U.S. exported about $130 billion worth of goods while imported goods totaled over $500 billion.

Throw in services exported and imported and we “exported” about $57 billion and “imported” about $17 billion.

Even a 100% tariff on every product and service couldn’t match the damage inflicted against the Chinese economy by U.S. tariffs, if this whole thing goes to the absolute possible extreme.

But the fact of the matter is that the importance of some goods simply isn’t reflected in their current prices.

While the focus is on retaliatory tariffs, there is another trick in China’s playbook.

It has played it before, and it is looking more and more likely by the day that we’ll see it again.

A Look Back At Rare Earths

You only have to look back five to ten years to see this trick in action.

Back in 2009, China imposed export limits. Part of the reasoning was that it wanted to build up local demand.

China basically wanted to capture more of the “value added” profits by shifting worldwide battery production from Western and Japanese producers to domestic ones.

At the time, China had about 30% of global deposits of rare earths but accounted for more than 90% of production. These figures haven’t changed much.

Prices soared along with stocks. Here is a chart from Business Insider and Molycorp from several years back showing price spikes in a handful of the most in-demand of the 17 rare earth minerals:

The U.S. used to supply all of its own rare earth needs until the late 1990s. Then cheap Chinese ore flooded global markets and domestic production all but ended.

Efforts were underway to reopen some of the old mines and find cheaper new deposits. China unilaterally put an end to that by lifting export limits in 2012.

Hence the meteoric plunge following the meteoric rise.

Underestimating by 4,000%

Now consider being at the start of that chart, looking at the possibility of export limits.

The cost or total value of imports would look minuscule compared to the price within just two years.

Imagine being a battery producer in the U.S. and having to pay 4,000% more for base materials.

Those batteries simply wouldn’t be made. Jobs would be lost. The damage caused far outweighs the original value ascribed to the imported goods.

This is a very real possibility today for a host of raw materials and goods that are not easily replaced by the rest of the global market.

A prime example is zinc. China is the world’s largest producer of this critical metal by a long shot.

It pulled 5.1 million tonnes out of the ground in 2017. The closest to it was Peru, with a relatively tiny 1.4 million tonnes.

Add in the huge mismatch between world supply and production, and we’re looking at the potential for China to hit the U.S. for a critical metal in everything from infrastructure to health care products.

Warehouse stock levels have fallen from over 1 million tons to around 200,000 tons in the past five years, which you’ll note is not enough to make up for the projected deficits of 385,000 tons this year and 165,000 tons in 2019.

The trade wars are finally getting serious, and present a fantastic opportunity for investors.

Zinc prices hit an 11-year high earlier this year, and all signs point to them only going further. Get ahead of the trend and position yourself to profit.

Take care,

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Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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