Negotiations roadblocks

The shakeout of markets on Friday was the result of decades of accumulated decisions made by China and the U.S. In 1979 China decided it was going to become a manufacturing powerhouse, ironically, copying th US manufacturing model. First, they started with lower quality products, then with everything. The U.S. decided that by virtue of holding the world’s reserve currency, and controlling institutions like the WTO, it could simply outsource everything to the world, importing goods and services as needed, and using its military power to make “adjustments” when and where it needed. Through COVID it was clear that the system had a huge weakness, and created other problems such as the wealth gap, but more importantly, it created a dependence with the country that has been working very hard for almost 50 years to become a great power, challenging the unipolar system created by the U.S. after the end of the Cold War in 1989. Trump is the first president in 50 years to fight China rise with something more than rhetoric, but he thought that by applying some pressure through tariffs, China was going to accept most of his conditions. But China knows it has a good hand, because it has something the U.S. really needs, the rare earth metals. As you can see in the chart below, it dominates the extraction and the processing. And China is using that card to negotiate hard. Furthermore, it has indirectly forced the U.S., the epitome of capitalism, to take measures historically associated with socialist or communist regimes, such as taking control of critical private companies (Intel, US steel, MP materials, Lithium America’s, Trikogy Metals), somehow validating the State Owned Enterprise model China has made popular. On Friday China said “not so fast”. The victory day military parade and the negative to accept US trade conditions is telling the U.S. you are no longer the only sheriff in town, and Trump was too impulsive to hold off. Markets are starting to realized that China is indeed frustrating the Trump administration and sent a signal. Trade negotiations will be tougher and longer than anticipated and the US will need to make concessions it may not be ready to make.

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