China has no good options for retaliating against Trump’s Huawei ban

[F-22Raptor]

US president Donald Trump has made Huawei the biggest story in tech right now by banning it from doing business with US companies. Huawei, China’s tech champion, has lost access to Google’s Android and Intel’s chips, and it’s even seen other international partners like ARM and Panasonic bowing to American influence and discontinuing trade. Having previously been on track to becoming the world’s biggest smartphone maker, Huawei is now in such dire straits that the best metaphor its founder could come up with to allay fears is that the company is like a plane with a hole in its side: not doing great, but still up in the air.

Bludgeoning Huawei with the ban hammer is, by Trump’s own admission, a negotiating tactic to focus China’s attention on American discontent with the existing trade relationship between the two countries. It lands atop a pile of punitive 25 percent tariffs he’s imposed on many Chinese imports to the US, and a promised further round of such tariffs on practically every Chinese export imaginable.

Two expert China observers tell The Verge that China very much cares about these restrictions on its most important overseas market, and it has every incentive to respond, whether to alleviate the sanctions or as a show of its own economic strength. But both agree that China has few, if any, good options available.

Veteran diplomat Hosuk Lee-Makiyama asks pointedly, “What does China have left to retaliate with?” It’s already imposed tariffs on the few classes of goods for which it wants to protect its internal market, and it’s excluded American internet giants like Google and Facebook, so what can China realistically threaten to do as a counter measure? Some observers, such as Ben Thompson in Stratechery, note that “China took the first shots” in the present trade war when it threw out many US tech firms, and it is now the US who is finally responding.

Lowy Institute’s Elliott Zaagman has spent the past 10 years living in and observing China, and he argues that the country’s economic prosperity is more brittle than it first appears. China’s “already at a point where growth rate is not an output, it’s an input,” meaning the government sets the goal it wants to hit each quarter and banks lend to hit that number. Beijing has done more monetary expansion, he says, than the US Fed, the Bank of Japan, and the EU combined. This has spawned a number of toxic asset bubbles — such as in housing, which has had trickle-down consequences of people taking on debt backed by overpriced real estate. Talking to him and Lee-Makiyama, you get the sense that China’s economy is closer to a pyramid scheme than a truly thriving and flourishing giant.

Retaliation is particularly risky because China’s economy relies on ever increasing trade with the world, as evidenced by the massive Belt and Road Initiative to develop land and sea routes for faster transport of goods. And Huawei, though a privately held entity, has been very helpful in procuring high-value overseas business with its lead in network infrastructure, 5G equipment, and, most recently, premium smartphones. Lee-Makiyama notes that because the country lacks a social safety net, it cannot afford to ever take its foot off the gas, which is what the Huawei setback inevitably represents. Economists, he says, have long held 6.5 percent economic growth as the threshold below which China can’t dip if it’s to sustain its growing debt, and China reported 6.4 percent growth in the first quarter of 2019, before Trump’s harshest tariffs had taken effect.


It’s in this context that we must look at China’s apparently formidable arsenal of weapons it could deploy against the US.

There are also more sophisticated kinds of financial warfare. China holds a trillion dollars of US debt, which it could dump on global markets and thus trigger an interest rate spike for the US economy. The Washington Post’s Robert J. Samuelson explains the mechanics of this succinctly, however he argues that China would be doing almost as much harm to itself in the process. A slowdown in the US economy would lead to even less appetite for Chinese exports, the US dollar might also go down in value and make Chinese goods less appealing, and whatever US treasuries China is left with would also be worth less. This illustrates the inherent symbiosis between Chinese production and American consumption, which have together formed the backbone of the global economy over the past 20 years.

The most threatening retort since Huawei was turned into a trade pawn by Trump has been a visit by president Xi Jinping to a rare earths facility. This was a wordless reminder of China’s dominance in collecting and processing the rare earth minerals essential to every smartphone, laptop, hybrid car, and practically anything more advanced than a gas oven. The CEOs of two US headphone manufacturers tell The Verge that China is the only place to buy the neodymium magnets required for their products: one said China is the sole source, the other said it controls 95 percent of the market. If you struggled to wait a few weeks for those sweet new Powerbeats Pro to go on sale, try waiting months and months for an alternative source of magnets.

And yet, as my colleague James Vincent has already set out, rare earths are not the secret weapon China imagines them to be. They’re not all that rare, the response to Beijing hoarding its supply would be production becoming economically viable and ramping up elsewhere, and the ultimate outcome would be fewer jobs and fewer exports for China. Lee-Makiyama sees this as an untenable scenario and points to China’s ill-fated attempts to use rare earths as a trade cudgel in its dealings with Japan and the US in the past.

Finally, and most obviously, the Chinese government could just do the tit-for-tat response of imposing sanctions on American businesses operating within its borders. Even with some older-model iPhone assembly in India, the vast majority of Apple’s smartphone business is built on Chinese land. Chipmakers are even more dependent, as an analysis from HSBC finds that Apple compatriot Qualcomm has 65 percent of its revenue vulnerable to disruption in trade with China. Other US tech firms with similar exposure include Broadcom at 54 percent, Micron at 51 percent, and AMD, Intel, and Texas Instruments all pinning at least a quarter of their revenues on continuing trade with China.

US consumers can also be hit through impositions on brick-and-mortar retailers. Chinese imports account for 26 percent of Walmart’s merchandise, which is on the low end compared to a more typical number like Target’s 34 percent, according to UBS. Additional research by UBS says the Trump administration’s tariffs imposed on Chinese imports “could put $40 billion of sales and 12,000 stores at risk.” The American Apparel & Footwear Association calls the next round of tariffs “a self-inflicted wound that will be catastrophic for the nation’s economy.” If tariffs are catastrophic, what would a total ban from China look like? This is arguably the most effective weapon Beijing could wield in its negotiations with Washington, but the corresponding hit on Chinese trade would be every bit as disastrous.

In Lee-Makiyama’s estimation, no scenario that involves China cutting off or constricting business with the outside world will be palatable to the country economically. Even with its rapidly growing national consumer market, China is still in need of more consumers for its goods and services. And with Apple and its compatriots like Nike, General Motors, and Walmart employing millions of Chinese workers, Trump has the leverage he needs to play hardball. That situation won’t last long, the diplomat warns, and now might prove to be the last good chance for the US to lean on the mutual dependency it has with China. If the trade relationship remains as it is, China will eventually grow its way to be colossal both as producer and consumer, and then American influence would be null.

For the US, what’s at risk are company revenues and profits. The country’s broader economy may suffer, but Lee-Makiyama says few people would notice if the GDP growth rate dipped from 3 to 2 percent. The same contraction for China’s economy, he contends and Zaagman agrees, would be disastrous. This asymmetry is at the heart of why the Trump administration can afford to be self-destructive in its tariff regime while China cannot indulge in similar costs to score trade negotiation points.

The Chinese government was “definitely caught off guard” by the brusqueness of Trump’s actions, says Zaagman, which was “not anticipated at all.” That might explain why Beijing didn’t make fuller or better contingency plans for a situation like today. Then again, Xi might find consolation in the fact that the same surprise must also be reverberating inside the offices of US tech giants, as Asia economic observer Tony Nash, formerly of the Economist Intelligence Group, questions why American companies hadn’t diversified their manufacturing sooner. Their lack of preparedness may give China some reassurance that hostilities won’t escalate much beyond their current point without China firing back.

Without having a clear and coherent plan for its reaction, which neither Lee-Mikayama nor Zaagman believe Beijing is even close to right now, the best strategy for China is to do nothing material and maintain a “strong and silent” posture — which is exactly what the country is doing, commenting only to say that it “won’t flinch.”

The damage, “the stuff that saps one percent off GDP growth every year,” says Zaagman, has already been done. Silicon Valley investors are now looking for startups with reduced China exposure; big US tech manufacturers are exploring Vietnam, Mexico, and other potential production outlets; and China has found its prejudices that it can’t trust the US confirmed. Now that Trump has pulled the big red Huawei lever, China is wise to avoid hurriedly mirroring the move. Then again, it’s not like it has much choice.

https://www.theverge.com/2019/5/29/18637291/huawei-ban-trump-trade-war-china-united-states-tariffs

 

[nang2]

For a foolish nut job, there are always far more good options to wage a war than any sane person.

 

[Sineva]

Looks like that rare earth option is being seriously considered.

China ready to hit back at U.S. with rare earths: newspapers

BEIJING (Reuters) - China is ready to use rare earths to strike back in a trade war with the United States, Chinese newspapers warned on Wednesday in strongly worded commentaries on a move that would escalate tensions between the world’s two largest economies.

President Xi Jinping’s visit to a rare earths plant last week had sparked speculation that China would use its dominant position as an exporter of rare earths to the United States as leverage in the trade war.

Rare earths are a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment. The prospect that their value could soar as a result of the trade war caused sharp increases in the share prices of producers, including the company visited by Xi.

While China has so far not explicitly said it would restrict rare earths sales to the United States, Chinese media has strongly implied this will happen.

In a commentary headlined “United States, don’t underestimate China’s ability to strike back”, the official People’s Daily noted the United States’ “uncomfortable” dependence on rare earths from China.

“Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,” it said.

“Undoubtedly, the U.S. side wants to use the products made by China’s exported rare earths to counter and suppress China’s development. The Chinese people will never accept this!” the ruling Communist Party newspaper added.

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!”

The expression “don’t say we didn’t warn you” is generally only used by official Chinese media to warn rivals over major areas of disagreement, for example during a border dispute with India in 2017 and in 1978 before China invaded Vietnam.

In its own editorial on Wednesday, sister paper the Global Times said an export ban on rare earths “is a powerful weapon if used in the China-U.S. trade war.”

“Nevertheless, China will mainly use it for defense,” it added, noting that while China might incur losses from a ban on exports, the United States would suffer more.

The paper’s editor had said on Twitter late on Tuesday that Beijing was “seriously considering” restricting rare earth exports to the United States.

China has used rare earth sales to exert pressure in past diplomatic disputes.

In 2010, Beijing cut rare earth export quotas after a Chinese trawler collided with two Japan Coast Guard ships near uninhabited islands in the East China Sea that both countries claim.

In 2012, Japan, the United States and European Union complained to the World Trade Organization (WTO) over the restrictions. Two years later, China was rebuked by the WTO for citing environmental reasons to justify the quotas. It ultimately scrapped its export quota system after losing the case.

Chinese trade experts say if Beijing moves forward with new restrictions on rare earth exports to the United States, it will likely follow Washington’s example and use national security as a justification.

China has repeatedly criticized Washington for what it says are abuses of national security exceptions at the WTO, including this week when, according to media reports, it accused the United States of breaking rules by blacklisting Huawei Technologies Co Ltd, the world’s largest telecom network gear maker.

But China for years has used national security considerations to block major U.S. technology companies, including Google and Facebook, from operating in its market.

Such restrictions have in recent years fueled calls from within some parts of the U.S. business community for Washington to pursue more reciprocal policies with Beijing.

Shares in the company Xi visited last week, JL MAG Rare-Earth Co Ltd, surged another 10% to a record high on Wednesday, having gained 134.1% in May alone. China Rare Earth Holdings Ltd soared more than 40%, while Australia’s Lynas Corp, the only major rare earths producer outside of China, climbed as much as 14.6%.

China accounted for 80% of rare earth imports between 2014 and 2017 by the United States, which has excluded them from recent tariffs along with some other critical Chinese minerals.

Beijing, however, has raised tariffs on imports of U.S. rare earth metal ores from 10% to 25% from June 1, making it less economical to process the material in China.

Some trade analysts expect an acceleration in bringing fresh rare earth mining capacity on line in California and Australia if China uses its dominant position in the market for diplomatic advantage.

https://www.reuters.com/article/us-...e-earths-ruling-party-newspaper-idUSKCN1SZ07V

 

[Viet]

Huawei 5g? Vietnam has own 5g.
Huawei phone? We have bphone.
Is there anything we need from the company?

 

[Phantom.]

US imports 80 percent rare earths........so china will use them in trade war

 

[Feng Leng]

LOL we already launched our JL-3 SLBM in this trade war, hitting military and industrial installations all across the United States with MIRV thermonuclear warheads!

https://www.bloomberg.com/amp/news/...-weaponize-rare-earths-dominance-in-trade-war

 

[phancong]

Rare earth is the biggest option China can strike US at the heart of US technology industry. US import 80% of rare earth from china, without China export rare earth US will pay double for the price of rare earth import. Every electronic equipments will be much more expensive to produce.

Will cause US manufacture to outsource more jobs to 3rd world country to compete with china. US in the long run will lose the most in the long run of trade war.

 

[Turingsage]

US imports 80 percent rare earths........so china will use them in trade war

US has its own rare earth mines now put on ice because processing rare earths is a dirty polluting process. US left it to others to carry on. If things got bad they could reopen.
There is NO RARE EARTH monopoly. US used to produce its own much before China decided the pollution and lost lives was worth it

 

[j20blackdragon]

Anything that is made in China can be un-made by China.

Or confiscated by China.

 

[phancong]

US has its own rare earth mines now put on ice because processing rare earths is a dirty polluting process. US left it to others to carry on. If things got bad they could reopen.
There is NO RARE EARTH monopoly. US used to produce its own much before China decided the pollution and lost lives was worth it

China dominate in rare earth export because China had 45% of the world rare earth deposit, China is the largest most complete processing plant of the rare earth in the world. US will need at least 5 yrs to get a complete rare earth processing plant to run at the lost cost and US had a minimal rare earth deposit in the world. There no replacement for China rare earth in the US without incite a heavy cost to the US technology industry.

 

[Turingsage]

China dominate in rare earth export because China had 45% of the world rare earth deposit, China is the largest most complete processing plant of the rare earth in the world. US will need at least 5 yrs to get a complete rare earth processing plant to run at the lost cost and US had a minimal rare earth deposit in the world. There no replacement for China rare earth in the US without incite a heavy cost to the US technology industry.

Thats just the kind of jingoistic nonsense propagated by the uninformed and the gullible.
I dare China to go ahead and ban all exports of rare earths, really.
In no more than six months the supply from the rest of the world would easily meet demand. It will cost more but rare earths are used in small quantities and there is substitution and more efficient usage
In Chemistry we used the term rare earths not because they are rare but because concentrations are low. Rare earths are very evenly distributed around the globe and can be found in tens of thousands of places in small concentrations

 

[phancong]

Thats just the kind of jingoistic nonsense propagated by the uninformed and the gullible.
I dare China to go ahead and ban all exports of rare earths, really.
In no more than six months the supply from the rest of the world would easily meet demand. It will cost more but rare earths are used in small quantities and there is substitution and more efficient usage
In Chemistry we used the term rare earths not because they are rare but because concentrations are low. Rare earths are very evenly distributed around the globe and can be found in tens of thousands of places in small concentrations

Since most of the rare earth scattered across th globe with low concentration deposit among the country except China, there weren't enough economy and environmental sense to invest in the processing plant of rare earth in the world to drive up the supplies just for the US. Without China export of Rare earth the price will be double for US to import the replacement 80% of rare earth coming from China.

 

[kankan326]

Thats just the kind of jingoistic nonsense propagated by the uninformed and the gullible.
I dare China to go ahead and ban all exports of rare earths, really.
In no more than six months the supply from the rest of the world would easily meet demand. It will cost more but rare earths are used in small quantities and there is substitution and more efficient usage
In Chemistry we used the term rare earths not because they are rare but because concentrations are low. Rare earths are very evenly distributed around the globe and can be found in tens of thousands of places in small concentrations

Quoted

 

[lcloo]

Huawei 5g? Vietnam has own 5g.
Huawei phone? We have bphone.
Is there anything we need from the company?

China's export to Vietnam grew at the largest rate than other major importers of Chinese goods in 2018. The supply chain of factories in Vietnam depends on China's. The more export from Vietnam to US, the more they have to import from China. Looks like it is just a game of re-routing Chinese components into Vietnam for final finished products to be exported to USA.

Vietnam gains no doubt, China's export diverted to Vietnam, but no US companies are going to move back to USA.

Vietnam's balance of trade with USA will grow, China will slow down in export but overall economy will be intact thanks to shift to domestic consumption, while USA will still face huge balance of trade deficit, this time it is US-Vietnam trade.

 

[phancong]

China's export to Vietnam grew at the largest rate than other major importers of Chinese goods in 2018. The supply chain of factories in Vietnam depends on China's. The more export from Vietnam to US, the more they have to import from China. Looks like it is just a game of re-routing Chinese components into Vietnam for final finished products to be exported to USA.
View attachment 562538


Vietnam gains no doubt, China's export diverted to Vietnam, but no US companies are going to move back to USA.

Vietnam's balance of trade with USA will grow, China will slow down in export but overall economy will be intact thanks to shift to domestic consumption, while USA will still face huge balance of trade deficit, this time it is US-Vietnam trade.

In 2 yrs US will squeeze Vietnam neck for a balance trade that allow US total control of Vietnam finance and reduce Vietnam state own enterprise economy. US will squeeze Vietnamese balls so hard they will be num for century.