In the context of the aggravation of the economic war between the United States and China, discussions have naturally intensified on how Beijing can resist the economic power of the United States, especially given the fact that the world economy is still dependent on us dollar as the main currency of international trade, and that the closure of us markets can cause Chinese export-oriented companies really serious damage. China’s main foreign policy media, the Global Times, points to “three trump cards” that can be used by Beijing to at least equalize the chances in the fight against the trump administration and cause the American economy tangible damage that may cause the enemy to temporarily moderate its ambitions. An article by a Professor at the People’s University of China, published in the Global Times, lists the following “trumps»:
The 1) embargo on the supply of rare earth metals to the United States,
2) blocking access of American companies to the Chinese market and
3) the use of the Chinese portfolio of us government bonds to collapse the market of us government debt instruments.
Each of these “trump cards” should be considered in detail both in terms of the impact on the American economy and in terms of the possible response of the United States and the consequences for the world economy as a whole.
The ban on the supply of rare earth metals in the United States will be really quite a painful blow for American electronics manufacturers and the entire American high-tech. For rare earth, metals are a key raw material for the production of smartphones, various chips and other products with high added value, which are the most important “cash cows” of American companies such as Apple and Boeing.
Reuters, which is hard to suspect of sympathy for official Beijing, reports: “the United States has once again decided not to impose tariffs on rare earth metals and other important minerals from China, emphasizing its dependence on China for a group of materials used in everything from consumer electronics to military equipment.»
We can not say that China is a monopolist in the market of such materials, but without Chinese supplies, on the market, a real deficit is formed with quite predictable price consequences. And it is likely that some deficit positions cannot be closed for any money.
However, not everything is so simple: if such an embargo is imposed, Beijing will face certain technical difficulties. If we impose sanctions only against American companies, they will still buy the necessary materials through Japanese or European companies-gaskets, which will reduce the effectiveness of the embargo to almost zero. And if we introduce a total ban on exports, not only American but also European companies will suffer, which will lead to retaliatory actions by the European Union against Chinese exporters to Europe, which will be very painful for China, especially in the context of the us economic war, which makes access to European markets very valuable for the Chinese economy.
It turns out that the embargo on the supply of rare earth metals is a powerful weapon, but its use will require incredible accuracy and serious diplomatic efforts in order to avoid extremely unpleasant side effects.
Blocking access of American companies to the fast-growing and very deep Chinese market is the “second trump card”, which the Global Times writes about. It should be seen not from an economic (although this may seem logical), but from a political point of view. In the case of such prohibitive measures, their goal will not be to inflict some unacceptable damage on the American economy but to force the full power of the lobbying machine of the American corporate sector to work against Donald Trump and support his political opponents.
According to S&P Dow Jones Indices, Asia as a whole account for only about 14 percent of the sales of large us companies from the S&P 500 index. If we assume that China accounts for most of this volume, even the complete closure of Chinese markets will not be a disaster. However, there are several important nuances: first, China is the only (and last) point of sales growth for many American companies. That is, China will be closed — and there will be nowhere to take growth for graphs in the presentations.
Second, China plays a key role in many production chains that are pumped by sales to the US and other markets. That is, the loss of access to Chinese production will be a severe blow to the competitiveness of American companies in the world (and even in us) market. Especially — in the event that European and Japanese competitors have access to Chinese production facilities will be preserved completely.
Under these conditions, the profits of American corporations and the prospects of the American stock market (which is the most important political barometer due to the fact that the savings of many Americans are invested in stocks) will be put at risk. These problems can be tried to stop the transfer of production to other Asian countries with cheap labor and favorable conditions, but it can not be done quickly, and to do so at risk — because trump is trading wars with everyone from the European Union and ending with such loyal to the US countries as Japan or India. In these circumstances, American companies will have a strong motivation to ensure that Trump could not be elected for a second term, and lobbying and political opportunities for that part of the American corporate sector, which will suffer from the use of the “Chinese trump”, can really play a key role in the political victory of trump’s opponents.
The “third trump card” is the dumping of the Chinese portfolio of us government bonds into the market. The Global Times writes: “China holds more than one trillion dollars in us Treasury bonds. China made a great contribution to the stabilization of the US economy by buying us debts during the financial crisis in 2008. The States will be in a sorry state if China hits a recumbent.” From this, we can conclude that the reset of bonds Beijing is likely to “save for the sweet” — in the sense that the maximum effect of such an action can be obtained at the time of the next crisis in our stock market.
By itself, the move will not cause catastrophic damage (although us bond prices are bound to fall), but if you do it at the time of maximum our vulnerability, this Chinese portfolio may well be the “straw that will break the camel’s back.”
In Beijing, there is no mood. As the global Times chief editor rightly points out on Twitter, “most Chinese agree that the US is stronger than China, and Washington has an initiative in the trade war. But we just do not want to give up and believe that the US will not be able to crush China. We are willing to endure some pain to teach the US a lesson.”
As China puts its trump cards on the table, the global globalized economy will crack and collapse — globalization is going backward, and it is likely that the output will be a very different economic system, in which there will be more protectionism, and instead of a global market, there will be several large regional markets with their own rules, dominant currencies, technical standards, and financial systems.
For Russia, this is more good than bad, because the current world rules were formed at a time when Russia was not in the best condition, and now there will be a good chance to derive maximum benefit from the ruins that will leave the war between Washington and Beijing.