Does China hold the trump card in the trade war

The US/China trade war may be close to entering its next stage — but China has a secret weapon.

Article updated: 14 August 2019 12:00pm Author: Michael Baxter

China may be be able to trump Trump, as it trumpets its not so secret weapon in the trade wars.

Trade wars matter — I say this, because a number of investors seem unperturbed by it all.

And of course, investors who focus on good companies and stick to it for the long term may have a point, but I am not so sure such complacency is justified.

As for the markets, they seem to rise and fall — or is that soar and crash? — depending on the latest rumour, hint or indeed bark from the US on the trade war.

The popular backlash against globalisation is terribly dangerous — politicians who obey the popular will, when that will is anti free trade, threaten to send the global economy spiralling deep into economic depression.

Then again, I note that Germany may be in recession, as the export dependent economy falls victim to anti-globalisation rhetoric. Yet Germany has been posting budget surpluses for sometime. Disposable income has been rising at a nice rate in Germany — unlike in the UK. If Germany were to respond to the threats posed by a slowdown in exports, by stimulating the economy, via a sharp rise in government spending, which it can comfortably afford to do — in turn increasing imports into Germany — then we may have moved a step closer towards fixing one of the underlying problems with the global economy.

As for China, it’s a good deal less export dependent than it used to be. Tariffs are hurting the Chinese economy, but they are not disastrous.

The markets, on the other hand, are skittish. if Trump barks out another threat to punish China, they tumble — but if he doesn’t follow through with a bite, for example delaying the latest threatened tariff hike to the end of the year, markets start going up again.

Meanwhile, the Chinese currency the yuan or renminbi seems to be especially vexing the US regime.

It’s odd — the US accuses China of being a currency manipulator, it would be right, if only it had a time machine.

A few years ago, indeed during much of that period when China was growing at an extraordinary rate, it did indeed keep the value of its currency artificially low. Back in the early days of the Obama administration, the cheap yuan was one of the Democrats’ favourite scapegoats for the lowly performance of the US economy. Whether China, which at that time was still very much a poor country, was really committing such a terrible sin is a moot point, however.

But that was then. China has become a lot less export dependent, its economy is supported to a much greater extent by internal consumer spending and indeed it began to support consumers by pushing the yuan artificially high.

When Trump accused China of being a currency manipulator, in a way he was right, but for precisely the opposite reason he gave — it was manipulating the currency artificially high, not low.

But now China has left the currency, more or less, to the markets — I say more or less, because the Chinese government does set a daily range for the currency to avoid wild swings.

As a result, the yuan fell sharply and Trump is spitting feathers.

But China is the market leader in rare earth minerals, that is its trump card. These minerals, such as cerium or thulium are vital, albeit cheap, components in computers.

China has played a canny game. I have no doubt that these rare minerals reside in many places around the world, but as they are so cheap, no one seems keen to invest the billions required to get at them.

So the Chinese monopoly persists — and if it were to respond to Trump's trumpeting it could produce its rare earth minerals trump card.

The biggest losers could be hardware companies. One rather large US hardware company, which goes by the name of Apple, has a double concern — sales into China are a key part of its business.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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