Trade Wars, Spycraft, and Weaponized Silk

For around 3,000 years, China maintained an airtight monopoly on silk.

China’s silk empire began in approximately 2400 BC, and the entire process was a state secret. From raising and processing silkworms, to weaving and dying threads.

Imperial workshops were vertically integrated and tightly controlled.

The punishment for revealing any silk secrets was death. Export of silkworm eggs and mulberry seeds (silkworms only eat mulberry leaves) was strictly forbidden.

The entire world thirsted for China’s silk. It was the ultimate luxury product. The elites of ancient Asia, the Middle-East, and Europe craved fine silk garments.

Much of Rome’s gold, for example, found its way to China to buy bolts of silk. So much so that Pliny the Elder, a noted Roman scholar and scientist, lamented:

“The women of Rome have stripped the empire of its wealth to clothe themselves in translucent garments.”

Ancient Romans loved silk, but had no idea how it was made for thousands of years. There were rumors it was combed from seaweed, or harvested from trees.

Little did they know it came from cocoons made by tiny silkworms.

The End of China’s Silk Monopoly

In the 6th century AD, two Byzantine monks smuggled out precious silkworm eggs inside bamboo canes, along with the knowledge to recreate the manufacturing process.

Soon, silk was being made in the Byzantine Empire, the Islamic Caliphate, Persia, and beyond.

It’s remarkable that ancient China was able to maintain the monopoly for so long. In today’s interconnected world, no monopoly could last so durably.

Silk had become an integral part of Chinese culture, and was an invaluable tool in diplomacy and trade.

As the silken monopoly faded, China’s power did too, for a while. However, over time the country would come to dominate various fields, including fabric manufacturing, porcelain, and certain modern goods.

Modern Monopolies

Now let’s jump back into the 21st century.

Once again, China is attempting to lock down a monopoly on something the rest of the world desperately wants: rare earth elements (for an intro, read this article).

Technically, China has been building expertise in rare earths since the 1980s, or even as far back as the 1950s by some accounts.

Chinese leader Deng Xiaoping famously quipped in the 1980s, “The Middle East has oil; China has rare earths.”

To be clear, rare earths as a whole aren’t truly “rare”, but China has them in the right ratios, in ideal geologic formations. They also have developed the best tech to mine, extract, and manufacture products using them.

China has fiercely protected this near-monopoly. Anyone who has attempted to compete in rare earths has been met by a flood of Chinese materials into the market. As a result, prices crash, and the new project goes bankrupt.

This happened to the former companies who ran what is now the MP Materials (MP) mine. And it’s why, when the Pentagon invested $400M in MP back in July, they also put a price floor on the rare earth elements the mine produces. Price floors are necessary to compete with Chinese production.

The West is working hard to circumvent China’s rare earth monopoly. But it’s going to take time, money, and lots of elbow grease to do so. And some environmental sacrifices, too.

America’s Semiconductor Empire

Just as we rely on Chinese rare earths to make our high-tech products, they still rely on us for Intel, NVIDIA, and AMD chips for necessities like AI hardware, laptops, and robotics.

China also relies on ASML, which builds the equipment that manufactures these semiconductors.

The U.S. has heavily restricted China’s access to these products since at least 2018. China is, of course, working to build their own alternatives. But again, this will take lots of time and money to get fully caught up. For now, they are claiming to abstain from U.S. chips, but are almost certainly still smuggling in vast quantities.

So now China has turned off the flow of rare earths to us. It’s a heck of a stalemate.

Sure, both countries can get caught up on the other’s technology, but it may take 10 or 20 years.

This is why I continue to believe that there will eventually be a grand deal. We will realize that both countries are better off, at least for now, trading freely with each other.

But both countries want to limit the other’s wealth and power. So it’s going to be an extensive negotiation and reaching a lasting deal will take a while.

In the meantime, the risk to the global economy is significant. I view the trade war with China as the top black swan risk today, by far. It has the potential to grind the global economy to a halt.

I am hopeful that by the end of President Trump’s current term, a long-term deal will be reached. But it may take another few years. Both Trump and Xi are hard-nosed negotiators, and these types of situations often require significant pain before one side gives way.

And no matter what happens, each country will continue to build domestic alternatives. China will work on its semiconductor industry, and America will work on its rare earths and natural resources. Additionally, America will keep working to re-shore semiconductor manufacturing, as we are seeing with Taiwan Semiconductor (TSMC).

Both the U.S. and China have realized that it was folly to rely on a potential adversary for critically-important goods.

We’ll continue to monitor this situation closely and report back soon.