This past week the news came out that the United States has fired the first salvo in what looks increasingly like the start of the trade war with China. Monday the U.S. Trade Representative (USTR) office announced that America will assess two new duties on foreign imports. These will be 30 percent tariffs on solar equipment and 50 percent tariffs on washing machines which are imported. While the measures are not directly aimed at China, that country is the largest producer of some of these items.
This long feared trade war between the United States and China reminds you why you need a gold IRA as a hedge for your retirement portfolio. Trade spats have a nasty habit of escalating into much more serious roadblocks to global trade over time. Such barriers to trade threaten financial markets ultimately. Today is a good time consider what gold goes in an IRA.
The U.S. Decision and China’s Initial Reaction
The new American duties on foreign imports are a first blow to China. It has become the largest maker of solar panels in the world. Over the course of 2017, the country exported nearly $3 billion worth of washing machines with its 21 million units shipped abroad.
The Chinese were quick to react to these tariffs the next day. They labelled them an unfair misuse of trade powers. The Chinese Ministry of Commerce called for the U.S. to exercise restraint in erecting trade barriers. Yet this may just be the beginning of a more hostile period in relations between the two nations. President Trump made campaign promises to punish countries that employ unfair trading practices with the United States.
Other U.S.-China Trade Decisions Imminent
More individual decisions are due out shortly in the U.S. on potential trade tariffs. The items up for consideration include steel and aluminum imports. The 90 day countdown for a final decision on steel is already well underway, while the report on aluminum just reached President Trump’s desk this week. Deutsche Bank Global Head of Economics Michael Spencer warned of what is at stake from Hong Kong:
“The possibility is what we feared last year happens this year. Outside of the geopolitical sphere, trade-related fears are probably the biggest external risks we face, since the whole cycle in Asia is currently still very export oriented.”
Clearly the Chinese are concerned about these unfolding events. Chinese President Xi Jingping has been trying to convince the U.S. not to go down this road. He phoned President Trump last week to discuss “positive changes” in trying to bring North Korea to the negotiating table on its nuclear weapons’ ambition.
President Xi argued that a “constructive approach” would be more effective in addressing trade arguments to open markets. Yet in other channels, the Chinese have come out with strong rhetoric on their own part. In the event of an unfolding trade war, their official national media outlets have threatened “all necessary measures” will be taken.
Trade Surplus and Other Tensions Flaring
Part of what has angered the U.S. administration is the report on the trade surplus with China shown in the graph below. The People’s Republic announced that the surplus between the country and the United States grew to $275.8 billion. President Trump’s reaction on last week’s phone call was that this increasing deficit between the U.S. and China is not sustainable.
Other tensions have rocked the relationship between the two countries as well. In December, China fought tougher sanctions being imposed on their ally in North Korea. That same month the American national security strategy report called Beijing a “revisionist power.”
Another point of contention between the two nations concerns the release of a report on Notorious Markets for Fakes. The USTR office list came out this January. It highlighted China’s enormous e-commerce company Alibaba and the firm’s Taobao marketplace as a significant source of reports on piracy and counterfeit goods. Spokesman Gao Feng of the Chinese Ministry of Commerce called into question how credible and unbiased this list was this past week.
At least one geopolitical analyst sees these events as culminating into a more serious blow to relations between the two countries. The Rhodium Group warned:
“In the first weeks of 2018 many are still catching up to the reality of shifting deep forces in US-China economic relations. Many in China think this is a rough patch and will blow over. It won’t.”
China’s Ability To Strike Back
The problem for international trade is that historically China does not endure such unilateral actions without reprisals. They have demonstrated a willingness and ability in the past to engage in back and forth retaliation on trade conflicts. Nowadays China has the economic power it needs to inflict decisive strikes back against the United States.
Chinese President Xi Jinping has a variety of ways that he can hit back at the U.S. on trade. The country can open up antitrust and tax probes on large American firms with significant Chinese operations. More than this, with their enormous and growing consumer market they can simply cut back on the quantities of American goods they buy.
The country has already threatened as much through their official communist news outlet Global Times. At the end of 2016 it warned that there will be economic reprisals if a trade war erupts. In one editorial, it stated boldly:
“Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.”
These are not idle threats either. President Xi delivered a $38 billion order to Boeing when he visited their Seattle factory back in 2015. Some research firms believe they will target those sectors that hurt President Trump the most if things get ugly. Asia-Analytica research company’s Managing Director Pauline Loong revealed that:
“Chinese think tanks are likely scrambling to identify the industries in the President’s support base that will lose out the most should it come down to a bare knuckle fight.”
In other words, the Chinese are willing to fight dirty to inflict as much political pain as they possibly can in an extreme trade conflict.
Past Chinese Retaliation Has Impacted Firms and Industries
The Chinese have already demonstrated their willingness to take on countries and companies that take part in political offenses. This January the global hotel firm Marriott International was harshly criticized by the communist government when it listed Taiwan and Tibet as nations on its corporate website. Marriott was quick to apologize and remove the offending listings.
In 2010, Norway’s parliament delivered the Nobel Peace Prize to Liu Xiaobo the Chinese dissident who was in prison. China responded by drastically cutting back on Norway’s important salmon exports in response. As China Economist Raymond Yeung of ANZ Bank has warned:
“Typically China may review the market access or operation of foreign companies in response to trade actions against them. This is a risk Trump’s administration needs to consider.”
It is a sobering reminder to you that geopolitical risks can have dramatic economic and financial market consequences. Fortunately gold offers insurance and protection during market turbulence. Now would be a good time to look into the gold IRA rollover rules and regulations before the trade spat between the U.S. and China escalates any further. It is easier to invest in gold today than you might think.