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A US-China trade war is heating up

A US-China trade war is heating up

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U.S. President Donald Trump and China's President Xi Jinping arrive for a state dinner at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Jonathan ErnstThomson Reuters

  • The US Commerce Department launched a new investigation into aluminum imports from China.
  • This is part of an ongoing trend of more aggressive US behavior on trade and a retreat from globalism more generally.
  • A "Fortress America" approach to trade opens the door for China to take a larger role in the global economy.


The U.S.-China trade war is real.

This week, the U.S. Commerce Department launched an investigation into aluminum imports from China – worth around US$600 million annually.

What’s more, the Commerce Department self-initiated this investigation (meaning, no U.S. company requested an investigation) – the first time it’s done this since 1991. So while the figure is small, the symbolism is big.

And this is just the latest trade investigation the U.S. has launched against China…

In September, the U.S. Trade Representative (USTR) began a “301” investigation into whether China’s intellectual property rules and practices are unfairly disadvantaging U.S. firms.

I think these investigations are likely just the beginning…

The U.S. is taking an aggressive approve to trade

As we’ve written about before, U.S. President Donald Trump has taken a “Fortress America” approach to global trade. Trump has led the U.S. into a sharp shift away from globalisation – for example, by promising to build a wall on the U.S./Mexico border and making it more difficult for people from certain countries that happen to be majority Muslim (while omitting from the black list those countries with which the Trump family has extensive business interests) to enter the U.S.

And one of Trump’s first acts as president was to pull the U.S. out of the Trans-Pacific Partnership (TPP) – a 12-country deal that would encompass around 40 percent of total global output.

Trump has also been promising to get into a trade tussle with China since the presidential campaign… and it’s relatively easy for him to keep this promise.

It’s widely assumed the 301 investigation will find China at fault in several areas. It’s also likely that China will not make major concessions to the U.S. When China and the U.S. fail to reach an agreement, Trump will likely launch major tariffs against Chinese imports next year.

What’s behind this? Well, Trump is an economic nationalist… and it’s one of the few campaign promises that he can make good on.

One possibility is that Trump is using trade restrictions to try to force China to do more to contain North Korea’s nuclear ambitions. You see, China is an important trade partner with North Korea. So it’s a crucial party to de-escalating tensions with North Korea. And the U.S. may be implicitly threatening sanctions if China doesn’t step up pressure on North Korea.

But you can bet China’s government will fight back against any restrictions.

What could happen next

With the U.S. retreating from globalisation, the door is open for China to take the reigns instead.

One of the most important benefits of globalisation is free trade. And China has made it clear that it will be happy to replace the U.S. in any potential trade deals – most notably in the wake of the dissolution of the TPP.

At least two other proposed trade deals, the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia-Pacific (FTAAP), could help bind Asia more tightly together – only with China, not the U.S., as the glue.

And America’s shift inward will have other implications beyond trade. It also means that China’s efforts to deepen its political and economic influence throughout the world will be made all the easier.

For example, China’s One Belt One Road (OBOR) initiative is a large-scale development and infrastructure programme announced by China in late 2013.

In short, China wants to become a major investor – with strings attached – through Asia and beyond. Spanning the breadth of Asia into Europe, the OBOR initiative incorporates around 60 countries, which account for a third of global GDP and around 60 percent of the global population.

And China says it will invest US$4 trillion into OBOR initiatives, although this could be over an extended period of time.

OBOR is a way that China can cement its strategic interests across a huge swathe of Africa, Central Asia and Eastern Europe at the same time.

While China is doing this… it’s meanwhile seeking to make up for lost ground in technology. That’s what the U.S. is upset about.

These are just a few examples of the slow by inexorable shift of the global political and economic centre, from west to east. (We’ve written more about this shift here.) And the looming U.S. trade war with China will likely only accelerate this shift.

Good investing,

Kim Iskyan
Publisher, Stansberry Churchouse Research

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