U.S-China Trade Tensions May Escalate Further Before Eventually Fading
Trump’s more conciliatory words after announcing a 100% tariff on China starting November 1 have eased market worries, though the issue is far from resolved. It is still possible that Trump will follow through with his threat on November 1, but unlikely that tariffs would remain elevated for very long.
The issue came to the market’s attention when Trump threatened massive tariffs on China on Friday morning, following through after the close with the announcement that a 100% tariff, above the significant tariffs already existing, would be imposed on November 1. However Trump’s moves were in response to a decision by China to impose restrictions of exports of rare earths and products containing them, and that was in response to a US decision to extend its own export controls of sensitive technology to China to overseas subsidiaries of Chinese firms.
China, due to its current dominance in global supply, has significant leverage over rare earth exports, though this will fade gradually in upcoming years as other countries step up supply. It will be harder for Trump to get a trade deal with China with such clearly US-favoring terms as those he was able to achieve with the EU or Japan, who depend on the US for security. Even Brazil, significantly less powerful than China. has felt strong enough to stand up to Trump’s tariffs.
The market appears to be betting on a “TACO trade” in which Trump backs down on the tariff threat, though it is unclear whether Trump would also have to make concessions on US export controls to get China to back down on its rare earth export controls. We suspect he ultimately would, though not without some resistance. His conciliatory words today gave no hint of a climb down on his part, more suggesting China’s Xi would be the one to do so. Trump may have been trying to keep attention away from trade wars while he was getting praise for the release of Israeli hostages from Gaza.
These fresh tensions with China are unlikely to be resolved before November 1 gets significantly closer. Some of Trump’s tariff threats earlier this year were initially implemented on the day of the deadline, with the climbdown following a few days later and after a market sell-off, so Trump following through on his threat on November 1 is not to be ruled out. US dependence on Chinese rare earths means an extra 100% tariff on China is unlikely to last for very long, but there may be a fresh escalation in tensions before the eventual climbdown.
