Perhaps of more significance than the detail of either side\u2019s complaints of the other\u2019s recent actions, however, is a looming meeting of Trump and China\u2019s Xi Jinping in South Korea later this month.<\/p>\n
That meeting, at the Asia Pacific Economic Cooperation summit<\/a>, is planned for November 1.<\/p>\n It is instructive that Trump\u2019s threatened tariff increase \u2013 on top of the existing effective rate of close to 40 per cent \u2013 wouldn\u2019t occur until November 1, which is the scheduled finishing date for the summit. The core of Beijing\u2019s barrage of new trade restrictions also wouldn\u2019t be implemented until after the summit.<\/p>\n \u2018Don\u2019t worry about China, it will all be fine! Highly respected President Xi just had a bad moment.\u2019<\/p>\n Donald Trump on Truth Social<\/p>\n That could suggest that China is seeking leverage for those discussions, deploying its most powerful trade weapon — its stranglehold on the critical rare earths sector — to demonstrate that Xi will be negotiating from a position of strength, rather than one of vulnerability.<\/p>\n It was China\u2019s imposition of restrictions on rare earths and rare earth magnets to the US earlier this year that caused the Trump administration to walk back their 145 per cent tariff rate on imports from China in April (which China had responded to with a 125 per cent tariff of its own) at the Geneva negotiations.<\/p>\n Within days of those restrictions being imposed, US auto companies were shutting down plants.<\/p>\n Loading<\/p>\n Rare earths and magnets are vital to many industries, most notably defence manufacturers, aircraft manufacturers, chipmakers and auto companies.<\/p>\n With China supplying about 70 per cent of the world\u2019s rare earths mining, about 90 per cent of their separation and processing, more than 90 per cent of magnet manufacturing and about 80 per cent of the world\u2019s battery cell production, it has an extraordinary powerful hand to play in response to Trump\u2019s tariffs.<\/p>\n Trump announced, on social media as usual, his response to China\u2019s actions, after writing that \u201csome very strange things are happening in China! They are becoming very hostile.\u201d<\/p>\n Interestingly, though, his response was surprisingly temperate. Asked later what would happen if China unwound the new export controls, he said: \u201cWe\u2019re going to have to see what happens. That\u2019s why I made it November 1 (after the scheduled meeting).\u201d<\/p>\n Trump, who said he would go to South Korea regardless of what China did, also posted another comment that lacked his usual aggression and, indeed, was placatory.<\/p>\n \u201cDon\u2019t worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn\u2019t want Depression for his country, and neither do I. The USA wants to help China, not hurt it!!!.\u201d<\/p>\n When Trump announced his \u201cLiberation Day\u201d tariffs<\/a> on everyone in April, financial markets revolted and Trump was coerced into deferring their introduction. It took until August before they were in place.<\/p>\n Investors saw that as an example of the \u201cTACO\u201d trade<\/a> (short for Trump Always Chickens Out).<\/p>\n On Friday, they revolted again, with the US sharemarket down 2.7 per cent (the tech-heavy Nasdaq market was down 3.6 per cent) and shares in tech leaders like Nvidia and AMD hammered. Nvidia was down 5 per cent and AMD 8 per cent.<\/p>\n Loading<\/p>\n Oil prices fell heavily, the US dollar weakened, US bond yields tumbled and the cryptocurrency market tumbled 11.6 per cent \u2013 initially wiping out nearly $US500 billion of value \u2013 before recovering some of those losses over the weekend. Bitcoin tumbled about 9.5 per cent before recovering nearly half its losses.<\/p>\n While Trump thinks China\u2019s economy is vulnerable to US trade sanctions, as it is, China\u2019s exports have held up surprisingly well despite a big slump in exports to America, which were down about 15 per cent in the first eight months of this year. Overall, its exports were up 5.9 per cent, as it exported more to South-East Asia, South America and to Europe.<\/p>\n Beijing also has the ability, which it has so far not exploited, to boost domestic economic activity.<\/p>\n Conversely, China knows that the Trump economy is faltering under the weight of the tariffs, with America\u2019s inflation rate rising in tandem with higher unemployment.<\/p>\n The US government has been shut down<\/a>, Trump has threatened (more) mass sackings of government employees and some of the administration\u2019s most high-profile policies are increasingly unpopular.<\/p>\n Unlike Xi, Trump has to worry about politics, with next year\u2019s midterm elections creating the prospect that the Democrats could seize control of the House.<\/p>\n Trump can threaten higher tariffs (and China can respond with higher tariffs of its own), or more bans on exports of things like semiconductors or aircraft parts, but Xi is insulated from their impacts on his economy.<\/p>\n Trump doesn\u2019t (yet?) have the ability to ignore the repercussions of his policies for Americans or the US economy. The reactions of US financial markets are also far more significant for Trump than anything China\u2019s markets might do for Xi.<\/p>\n Loading<\/p>\n That\u2019s probably why US markets\u2019 response this week could be important. If they bounce back, it will be because investors believe the TACO trade is alive. If they were to continue to slump, the pressure on Trump to revive that trade would mount.<\/p>\n In the lead-up to the first face-to-face meeting of Trump and Xi in six years, both sides were manoeuvring for leverage.<\/p>\n Trump was (misleadingly) boasting of the strength of the US economy, the power of his tariffs and America\u2019s ability to harm China\u2019s economy.<\/p>\n Xi didn\u2019t boast, he\u2019s just acted and in doing so, demonstrated that China has a trade weapon more powerful, with a far more precise ability to target America\u2019s key industries and an ability to impact them almost immediately – while also signalling that China would prefer a new and equitable trade agreement rather than a further escalation of trade hostilities.<\/p>\n Xi is saying \u201cback off,\u201d honour the principles behind the Geneva agreement<\/a> and do a fair deal.<\/p>\n Trump is signalling that\u2019s a very real possibility, despite the posturing of both parties. He does love a deal – and always, so investors believe, chickens out.<\/p>\n