The downward pressure on base metals prices intensified this week as Donald Trump turned his trade war rhetoric against China up a notch. Copper and zinc are now bumping off twelve month lows, and aluminium isn’t far off. Nickel, by contrast, although also down over the past month or two is actually 20% better off year-on-year, in part because it’s been playing catch up to other metals that have moved earlier in response to the global economic recovery that was carefully crafted by Janet Yellen and President Obama over the past decade.
President Trump’s threat to impose a blanket 25% tariff on all US$200bn worth of Chinese imports threatens to throw a spanner into all that good work though, as commodities traders are recognising. Overall, pricing is still bullish. Zinc prices in particular remain much higher than they were five years ago, copper and aluminium have dipped and recovered, nickel is coming back into focus, while lead, broadly, is flat.
But doubts about the upward momentum of the past couple of years are now widespread. The Chinese response to Mr Trump’s latest salvo effectively accuses the US of bad faith in negotiation, something which those with a negative view of Mr Trump won’t find hard to believe.
But we’re at a delicate stage now. Mr Trump’s US$200bn threat cannot be directly parried by the Chinese since China doesn’t actually import that amount of US goods, which is in part what Mr Trump is complaining about in the first place.
But China does hold significant amounts of US debt, and in this particular round of poker this last card could turn out either to be joker or dud. After all, Mr Trump is not telling China anything it doesn’t already know.
Week in and week out the financial press is filled with articles about Chinese enterprise spreading its wings globally. There’s the new silk road that runs into the world’s largest inland port in west Germany. There’s increasing Chinese presence in Africa. And there’s the recent cosying up of Russia to China.
Add that to China’s gradually increasing military presence in the South China sea, and it’s clear that China isn’t about to be pushed back into its old, self-imposed isolation by a USA fretting about long-lost manufacturing jobs.
But if China isn’t about to back down to Trump, then other questions arise. And in the immediate term, it’s these that are making markets skittish.
With global GDP on a tear, now’s probably about the best time imaginable to start a trade war, if it’s possible to make such a statement. The effects on global trade of disruption to the ties between the US are likely to be much less severe. Latest PMI manufacturing numbers from around the world, for example, look pretty robust. If a couple of points were to be shaved off them in the coming 12 months the rate of global GDP growth would slow, but the world wouldn’t necessarily tip into recession.
China is rapidly finding new markets. Trade patterns are already being altered in anticipation. And there’s also the possibility that some good comes out of all this, in that Chinese intellectual property theft diminishes, and that China itself opens up properly to international trade.
Of course, the last time China opened up to international trade was in the 19th century, a period of history the Chinese look back on as one of shame and humiliation. So the psychological barriers are significant.
But on the other side of the Pacific, there are pressures on Donald Trump too. The billionaire industrialist Koch brothers, key figures in financing the Republican party, have come out in open hostility against him – and their issue is trade policy and subsidy. They accuse Mr Trump of going against Republican free trade dogma and, what’s worse, of using New Deal era bail-out mechanisms to help US farmers hit hard by Chinese sanctions on produce.
Mr Trump, of course, is not for turning. Not yet, at any rate. An inconsequential discussion with EU boss Claude Junker was hailed by the US administration as a major victory. And we can expect more rhetoric of this kind as tariffs begin to bite.
In the end it may be that the Chinese and Americans compromise while declaring victory publicly. The trillions of dollars of US debt that the Chinese hold could play a factor, and it is at least possible to read the recent Russian sale of US debt as a shot across the bows for the US. In the end though, Mr Trump’s efforts to shift wealth back to the US industrial heartlands are onto a loser. The Chines, who play a long game, know it, and the Koch brothers, who are industrialists themselves know it.
How long it takes the rest of America to wake up to the reality is a guessing game that markets will have to continue to play for some time to come.