Trump Prepares to “Go Nuclear” on China

As you know by now, the Fed raised its target rate yesterday.

I’ll have more to say about that in the days ahead. But today I want to address some news that could have even larger ramifications for markets and the economy. The mainstream media haven’t given it nearly the consideration it deserves.

What am I talking about?

President Trump announced plans today designed to punish China for stealing American intellectual property.

The sanctions target China’s high-tech sectors and place restrictions on Chinese investments in the U.S. (see below for details).

It will likely trigger Chinese retaliation and reignite fears of a global trade war.

It was another bloodbath on Wall Street today, mostly because of the trade news. The Dow ended the day more than 700 points lower.

This should come as no surprise.

The stock market traded down when the trade war headlines first gained prominence early this month. That was when the Trump administration announced tariffs on imported steel and aluminum. (Incidentally, these tariffs take effect tomorrow, March 23.)

Then stocks just as quickly bounced back on the view that Trump’s bark was worse than his bite and that the tariffs and sanctions would be full of loopholes and exceptions.

But that was just wishful thinking.

It’s true that Trump offered relief to Canada and Mexico on the steel tariffs, but that was only so he could gain negotiating leverage on the ongoing NAFTA talks.

If Canada and Mexico fail to give Trump the concessions he wants on NAFTA, those steel tariffs can bounce back to hit Canada and Mexico, as they already hit China and Brazil.

The bottom line is the world is now entering a trade war.

This is something I’ve been warning about for at least a year.

So it comes as no surprise to the readers of my newsletter, Project Prophesy, even though a lot of elites and Washington insiders were shocked when it happened.

You must first understand that this is something Trump has been talking about for decades, going back to the 1980s.

Trump has long talked about unfair trade, the importance of tariffs, the importance of creating jobs and protecting U.S. industries. This was the first thing he touched on when he announced his candidacy in 2015.

He’s never since varied in his position. So anyone surprised by his recent positions wasn’t paying attention, was in denial or engaged in wishful thinking.

But, why didn’t Trump announce these policies on day one?

Well, the answer is he wanted to. But there were constraints. The biggest single constraint had to do with North Korea.

A marginal economy always on the brink of collapse, North Korea depends upon the economic support of China. Trump therefore hoped he’d limit North Korea’s nuclear ambitions by convincing China to withdraw economic support if North Korea persisted in developing nuclear weapons.

These efforts mostly failed.

In the first place, North Korea considers nuclear weapons critical to its survival and was never going to completely abandon its program. It sees that America has only attacked countries that did not have nuclear weapons, like Iraq and Libya. It fears a similar fate if it doesn’t develop its own nukes.

Secondly, China did very little to curb North Korea’s nuclear program. But this should not have been surprising.

North Korea is a thorn in America’s side. And Beijing doesn’t want to help the U.S. remove it. North Korea directly borders China. And China fears a united Korean Peninsula under the sway of South Korea and, by extension, the U.S. Why would China strengthen the American bargaining position?

Now Trump is taking the gloves off. And the trade war is finally here.

But the tariffs on steel, aluminum and solar panels are child’s play compared with the mother of all trade sanctions.

This is coming soon in the form of a report that will land on the president’s desk any day.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning