[NEIGHBOR'S EYE VIEW] A TRADE WAR BTWN US AND CHINA COMING?
Seems like president Trump wants another fight with China. His recent signing on the document for imposing "Customs levy" made a fire on big dispute between the two biggest countries of the world. The document doesn't include specific lists of products or scale of taxation yet though, This is quite meaningful event since he officially clarified a big drawing of his future stance about transaction between US and Chinese trading market.
NYT and Bloomberg estimated there will be about US$50 billion additional increase in annual tax revenue with this political decision and Reuter expected US$60 billion annual growth of tax. Major items expected to be included in the document are Shoes, clothes, Electric goods and other 100+products which China has been quite strong in the market during last many years. Well, seems like US fiscal health will be way better with this (?)...lol..
The ostensible reason that US government is now claiming is their grievance on the massive surplus of China in current international transaction with US. Trump and his team's rage against China's excessive profit on the market shows on the name of the document, "Memorandum Targeting China’s Economic Aggression" ....well... there is no exchange of shots between each other’s fleet yet, but this is already a declaration of a cruel war.
There also is a prospect that US government will restrict further investment of Chinese companies to US market. Just like the previous issue that US government stopped the acquisition of Qualcomm by Broadcom for protecting their intellectual properties of important industries. As a matter of fact, there currently are many restriction from Chinese government for foreign investors in terms of portion of foreign stakeholders in their domestic market, US government is trying to do the same for Chinese investors (It actually makes sense). I expect US government will protect their Information/communication technology, AI, 4th industrial revolution related IP and other industries needed to be specified under national safeguard.
So, with all these expected activities US government will carry out, China declared that they will proceed appropriate counteraction as well on the upcoming trade war.
What could be the cards China select as retaliatory measures?
I guess there could be 5 big cards China can select now.
1. Raising agricultural custom tax ;
Chinese are the biggest consumer/importer of American soybean and beef. They import 60% of American production which mostly produced from solidly republican distracts. In case China change the resource to Brazil or Argentina, it would be huge burden for president Trump and his party.
2. Promised investment on US market ;
When Donald Trump visited China last year(November I guess), Xi jinping promised US$250 billion investment to US market and there was a MOU about it. China might annul the MOU, since it is not legally bound, it will be kind of threat in political ways. Doesn't look so intimidating though;;
3. Boycott for US brands/goods ;
Korean supermarket brand "LOTTE MART" has lost US$1.2 billion in Chinese market last year because of their boycott against Korean products due to the missile defense facility of US ARMY THADD. And they decided exit from Chinese market recently.
4. Restriction for exporting rare minerals ;
There are 17 rare minerals only China produce in the world which are very essential for most of electronic equipment. For example, "rare-earth-metals". This material is indispensable item for EV, LCD and wind power motors. Japan has been humiliated deeply because of this restriction when they had diplomatic dispute with China. Could be very critical to US manufacturing industry.
5. US Treasury bonds ;
China, who has the world largest foreign exchange in their national account, is the biggest holder of US treasury bonds. They currently holds 8% of issued US bonds and it is approximately US$ 1.14 trillion value now (1/3 of China's national FX holding account). If they start selling the bonds in the market, price of the US bonds will fall down and interest rate will rise high. As a matter of fact, in the currency exchange market, US and China were very friendly ally to each other so far. During the financial crisis of 2008, China acquired lots of newly issued US bonds for QE(Quantitative Ease). This could be an arrow return for US but at the same time, it makes the fall down of China's FX asset value. But historically China has opened this card to give pressure to US government. In last January, China threw US$ 16 billion of US treasury bonds to the market when they were in sensitive situation due to North Korea issue and US stock exchange damaged quite much for several days. So I hope they would not want to create the worst scene on this matter.
The fight between world biggest two countries became a tinderbox to world economy. As close neighbor or both countries, I think South Korea and Japan will take some hard knocks on this issue. South Korae forced to renegotiate FTA and Japan got high rise of custom tax on steel products.
Wish our leaders would find good solutions for getting through this era of chaos.
Many thanks for reading.
-end.
This posting has been written under the perspective of individual South Korean(me).
I wrote this posting 23th March 2018 and all the contents in this page are personal think about the market.