U.S-China Trade Wars and the Gold Boom

“This is just the beginning — I want to tell you that,” President Trump said while speaking, with his economic council behind him, on investigating Chinese trade practices. “This is just the beginning.”

Trump, hitting directly on his campaign promise from 2016, signed an executive order to instruct his trade office to begin formal investigations into China.

The order has been a long time coming. While leaders in China might be under the impression that Trump is bluffing, investors, too, seem to be on the fence about how serious the White House is.

Is this another case of take Trump’s words seriously, not literally?

Taking no precaution, last week saw gold rally upwards of 2.3%. The increased rhetoric from North Korean threats, the Trump administration’s hardline on military action and the reality of growing threats of a trade war have stirred markets.

Gold, traditionally a defensive asset for investors in uncertain times, has been the benchmark for markets and investors seeking a safe place to land.

The market for gold has now hit its best levels in over two months. At the current rate, gold could soon break the $1,300 mark – a number not seen since the day after Trump’s election last November.

Destabilization and increased tensions between the U.S may be dangerous for geopolitical stability and the economy, but understanding the North Korean threat and how that relates to China has left many jumping to action.

A large consensus view is that gold could see a potential boom in the market for the remainder of 2017 and beyond if tensions continue between the two global powers continue. As the dollar weakens further, policy makers in Washington are in gridlock and the Fed positions itself for quantitative tightening anticipation has left investors seeking safe harbor in gold.

What Trade War Investigations Mean 

By Trump enacting section 301 trade investigations through his executive order, the administration has taken one step closer to imposing tariffs and trade restrictions that combat Chinese import-export markets.

The primary argument is that China has been unlawfully taking U.S intellectual property rights, and ultimately harming the state of the American workforce.

While that may be true, the problem is the economy is still considered by many to be in a recovery phase. A standoff between the Trump administration and China could devastate the global economy, even without a shooting war with North Korea.

In 2016 alone, U.S goods and services trade with China racked up a total of $648.2 billion. China is currently the top goods trading partner with the U.S totaling $578.6 billion in bilateral trade last year.

Nearly one million people are employed in the U.S because of the export of goods and services to China alone.

Yet with all of that connection, the fact remains that trade relations between both sides is uneven. Trade deficits, strategic tariffs and import restrictions, while very minor, still exist on both sides – regardless of what free trade statements might indicate.

For Trump, these imbalances were a benchmark of his campaign platform and something that his base continues to push for.  Still on the WhiteHouse.com agenda is an major policy initiative that seeks “trade deals that work for all Americans.”

So What Would a Trade War with China Look Like?

Since April, the Trump administration, under leadership of U.S trade representative Amb. Robert Lightizer has been organizing a plan to restrict steel imports with China.

The goal of such a plan would be to drive up the price of steel and bolster the weakened industry in the U.S which many economists attribute to being hurt by lowered Chinese pricing.

This is all a story we’ve seen before.

In March 2002, during the George W. Bush administration, the U.S placed a steel tariff of up to 30% on imports. The tariffs put in place were not necessarily targeted directly at China, but still had a considerable impact on the Asian giant.

As a repercussion to the measure, a strong backlash from the World Trade Organization (WTO) and major allies from the EU, UK, Japan and South Korea threatened a global trade war. After threats of billions in sanctions were authorized by the WTO, the Bush White House backed down in December 2003.

In a U.S government report that followed the Bush era tariffs Congress described the “unintended consequences” that hurt the American economy because of the imposed trade law. The Congressional research found that restrictions negatively hurt consumers and increased the unemployment rate throughout related sectors.

American companies at the time were left to “eat the margins” until the levies were lifted.

If such a trade war scenario were to happen at the same scale today, the margins would be hit even harder, the consequences much more severe unless done at proper levels and with strategic measures in place.

However, former White House cabinet member under Ronald Reagan and current board member of the Committee for a Responsible Federal Budget, David Stockman levels that the economy is already in critical shape.

Stockman notes that, “In the midst of a financial crash and unexpected recession, Washington will degenerate into political chaos. It will not be able to fund the American forces and interests abroad or even agree on how to stage an orderly retreat. Foreign policy will begin to dangerously flip-flop.”

The scenario that the former budget director paints is a stark one.  At best, he is partially wrong – yet that would still see a U.S economy being harmed. At worst, even his sobering outlook is undercutting the detriment that would be unleashed on both the U.S and Chinese economy.

Trade Wars, Public Disputes and North Korea

While many attribute the trade war talk coming down to China’s lack of proactive response to the North Korean crisis, the situation is much more complex than that.

China Daily, a state sponsored media outlet, penned that Trump is simply “asking too much” from China regarding North Korea.

While major media outlets highlighted the “poison” between the U.S – China relationship, there was a much deeper bi-line lost in the mix.

The Chinese Op-Ed read,

“By trying to incriminate Beijing as an accomplice in the DPRK’s nuclear adventure and blame it for a failure that is essentially a failure of all stakeholders, Trump risks making the serious mistake of splitting up the international coalition that is the means to resolve the issue peacefully.”

The Chinese government aimed to make it clear that it would not be held accountable for North Korean (DPRK) aggression – a threshold that would not work for the Trump administration.

In a very public dispute the U.S Secretary of Commerce, Wilbur Ross fired back. He wrote in the Financial Times that,

“President Trump is fulfilling another campaign promise to consider all appropriate tools to address Chinese trade activities that may be harming American economic interests. He is the first president to take any meaningful steps toward dealing with this hugely important issue.”

“Through this action he takes the necessary strategic step to protect the base of innovation that has fueled American productivity and undergirded our national security for decades.”

The message was a clear outline that intellectual property theft would direct foreign policy conversations between the U.S policy toward China. Lost in the editorial was any mention of North Korea, nuclear threats or the negotiation attempts found in Trump’s “art of the deal” approach.

The gloves seemingly had come off. Trump’s 100 day deadline for Chinese President Xi to act had long passed.

The question that remains is, what does such a trade war mean for the stability of the economy?

Economist and currency war expert, Jim Rickards’ believes that the divisions between the Trump administration and China are only just beginning.

By Rickards’ analysis, “Trump intends to go well beyond normal trade sanctions and will use national security as a reason to stop Chinese investment in the U.S. and stop unfair trade practices. When national security is invoked, the U.S. sanctions are not subject to normal review by the World Trade Organization.”

“China will not take the new sanctions lying down and will retaliate against U.S. exports to China. As this trade war escalates, markets may crash as they assess the damage to corporate earnings and global growth.”

The currency wars expert believes that we no longer have to debate whether a trade war with China will happen — he argues that it’s here.

“Investors should prepare now for the turmoil to come by reducing equity exposure at current high levels and moving more wealth into cash and gold.”

Thanks for reading,
Craig Wilson@craig_wilson7
for the Daily Reckoning

The Daily Reckoning