The U.S – China Trade War Flare Up and Rare Earth

What a Difference a Day Makes

There was a material shift in risk sentiment through the European and U.S sessions on Tuesday.

As the global financial markets experienced during the extended Canada, Mexico and U.S trade talks, positive updates from the U.S – Japan trade talks had a muted impact on the global markets at the start of the week.

In stark contrast, the extended U.S – China trade war has had a far more significant impact and rightly so when considering the size of the respective economies.

U.S President Trump spoke on Monday, saying that the U.S was not yet ready for a trade deal with China. The comments came with the U.S equity markets closed for Memorial Day.

It was an altogether different story on Tuesday, however.

Not only did the European and U.S equity markets respond to Trump’s comments but also China’s response.

The sentiment at home has meant that China is unlikely to sit back and allow the U.S to bully them into a trade agreement.

There is some logic to the latest U.S administration attack on a Chinese telco. Talk of agreeing to include Huawei into trade negotiations suggests, however, that the latest onslaught is more of a strategy to corner China into concessions rather than in the interest of national security.

Unsurprisingly, the Chinese have been somewhat strategic in retaliation.

The extended trade war continues to plague U.S farmers. While Trump intimates that he’ll be more punishing to the Chinese in his next term, failure to resolve the current trade war could leave the U.S President out in the cold next November.

What Lies Ahead

The markets need progress. A lack of progress and further deterioration in economic data would reignite fears of a global recession. Demand for U.S Treasuries is already on the rise.

At present, the U.S President is able to boast, not only about the U.S economy but also about the U.S equity markets.

There’s a long way to go before the next U.S elections and there’s also a lot that can go wrong. Small wins are unlikely to be enough to support the majors, so the market fixation will continue to be on the U.S – China trade war.

President Trump has looked to distract the markets with currency manipulators, whilst also giving the EU a 6-month grace period before rolling out tariffs on autos.

Interestingly, it wasn’t too long ago that U.S President Trump had berated Germany for benefiting from a weaker EUR…

So, the real question is whether the latest threat of bringing rare earth into the trade war arena was authorized by Premier XI?

China is considered the OPEC of rare earth. The second question to ask is whether a reduction in export quotas will have a material impact.

The China manufacturing sector is deeply entrenched in the global tech supply chain. In addition to the export of rare earth, rare earth is also present in exported Chinese components.

The U.S is certainly not in the position to manufacture tech components. The U.S is also unable to source demand for rare earth from elsewhere.

China could, not only suppress the export of rare earth, but also the very components that U.S tech companies need.

Throwing farmers under the bus is one thing. Throwing the likes of Apple and Microsoft under the bus is an altogether different proposition.

The Japan Alternative

 

The timing of Trump’s visit to Japan and China’s latest threat may not have been a complete coincidence. Japan is reportedly the world’s 2^nd largest exporter of rare earth to the U.S.

While the 2^nd largest exporter, Japan doesn’t even make the top 10 as a miner.

That could change, however…

In 2018, an estimated 15m ton rare earth discovery under Japanese waters is reportedly large enough to support demand for hundreds of years. That’s not just enough to meet global demand for generations but would push China out of the number 1 spot.

It’s going to take some time for Japan to gain access to the rare earth discovery, however. That gives China a finite period of time to wield the rare earth weapon…

The U.S will certainly want a piece of Japan’s rare earth find. Will China look to buy in, and attempt to maintain control of the rare earth market?

It’s going to come down to mining costs. With the find sitting at the bottom of the ocean, it’s not going to come cheap…