Trade Wars Accelerate

This post Trade Wars Accelerate appeared first on Daily Reckoning.

During Donald Trump’s first term, U.S. tariffs on China increased from 3% in 2016 to 19% by the end of 2020.

As a result, China’s share of the U.S. trade deficit dropped from 47% to 26%. However, it’s worth noting that America’s trade imbalance continued to rise, as production shifted to low-tariff countries such as Vietnam, Canada, and Mexico.

When Biden came into office, the expectation was that he might roll back the China tariffs.

He didn’t. In fact, the Biden administration ramped up the trade war quite a bit. In 2022, strict restrictions on U.S. technology exports to China were implemented. The primary target was advanced chips such as NVIDIA GPUs, which are critical for AI and other emerging technologies.

The equipment used to manufacture such tech was also heavily restricted. This mostly affected ASML, a Dutch company responsible for making the machines that manufacture advanced semiconductors.

Today, China is completely cut off from the most advanced chips and the ability to use foreign tech to build them.

These restrictions have hampered China’s ability to build advanced AI data centers, and their problem will only get worse until the country can build up its own semiconductor industry to be competitive with the U.S. and Taiwan. Or until they can strike a deal to reopen access to the technology.

Xi Strikes Back, Drone Wars Begin

A few weeks ago China fired a salvo aimed squarely at key U.S. industries. The country heavily restricted exports to America of critical minerals and rare earth elements. Included in the list were antimony, graphite, gallium, and many more.

These minerals are critical for manufacturing lithium batteries, weapons, semiconductors, fiber optic cable, and other high-tech necessities. And China dominates their production currently. This will become a significant issue as existing stocks start to run low.

Additionally, in early 2025, China will begin severe export restrictions on drones and parts used to manufacture them.

Skydio, the largest American drone manufacturer, has already begun a policy of rationing batteries to one per drone. The company’s CEO explained the situation in a blog post:

“As a result of the sanctions, our battery supply will be reduced for the next few months which will impact our customers. We have always manufactured our drones in the U.S., and over the last few years, we invested massively in bringing up supply for drone components outside of China.

Batteries are one of the few components we have not yet moved out of China. We have a substantial stock of batteries on hand, and our team was already developing alternative suppliers. But right now we don’t expect new sources to come online until the spring of next year.”

Skydio supplies both the American and Ukrainian militaries. So this is clearly a strategic move by China. It will take time to build alternative supply lines in this area, and drones have become absolutely critical to modern warfare.

And isn’t it interesting that all of this is happening while there’s an unprecedented number of mysterious drone sightings across the country? My guess is the U.S. government is demonstrating to adversaries that we have advanced drone programs too, and won’t be intimidated. But we’ll continue to monitor that story.

Just Getting Started

The trade war is getting hot, and Trump isn’t even in office yet.

There are massive imbalances in global trade which must be dealt with. America has lost its manufacturing edge, and it’s probably not coming back without aggressive trade and monetary policies.

If we simply let the status quo continue, it’s likely that China would continue to dominate global production. The CCP is subsidizing industries, and suppressing its currency, and as a result, has gained a significant advantage in manufacturing expertise.

Trump’s task is to build back America’s industrial base by encouraging domestic production. In trade, he will need to carefully balance the carrot with the stick. We are too interdependent with China to simply cut things off completely. Yet the current situation is also unsustainable.

Government should encourage U.S. production of critical items such as semiconductors and batteries while maintaining enough of a relationship with China that trade lanes stay open in the meantime. It comes down to putting the right incentives in place and spending wisely.

Ultimately, rebuilding U.S. industry may also require a weaker dollar. With the dollar so expensive compared to other fiat currencies today, it’s difficult for our exporters to compete with China and others on price. It will be interesting to see what President Trump does in this area.

President Trump will need to utilize every bit of his deal-making chops in this upcoming term. The future of the American economy depends greatly on the agreements which will be struck over the next 4 years.

The post Trade Wars Accelerate appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.

Source: https://dailyreckoning.com/trade-wars-accelerate/