China Can’t Kowtow to Trump’s Fentanyl Fuelled Trade War Threats – Fat Tail Daily

There’s only one way to put this. I’m scared. And nobody else seems to care about why…

But I’ll try to tell you anyway.

The risk of a serious and severe trade war is dramatically higher than markets are pricing in. And Australia’s economy and financial markets are most at risk if it kicks off.

I’m sorry if that’s obscure or confusing. I know it doesn’t gel with what’s in the news right now…

Markets are in recovery mode. Trump’s rather boisterous negotiation tactics have worked brilliantly against Colombia, Mexico and Canada.

He threatened them with tariffs. And within hours, they folded like a house of cards.

Boom.

Surely this proves that Trump’s tariff threats are just a (successful) negotiating strategy? A way to crack geopolitical nuts by throwing America’s economic weight around.

Not many countries’ economies can survive being cut off from the mighty American consumer. So they are forced to give Trump what he wants when he threatens to tariff their goods.

The Colombians agreed to take their illegal immigrants back because they need to sell Americans vast quantities of long-stemmed Valentines’ Day roses.

The Mexicans and Canadians agreed to stem the flow of fentanyl into the US because they need someone do drink their tequila and maple syrup.

Trump’s threats worked. America won. Job done. The stock market’s back up. Simple.

Maybe.

Hopefully.

But, like I said, I’m terrified we’re on the cusp of this strategy backfiring spectacularly the next time it’s tried.

In a specific way which would sink the Aussie dollar to new lows, undermine the ASX200 back to pandemic levels and send the Aussie property market into meltdown.

China won’t roll over so easily

So far, nobody has actually called Trump’s bluff…to find out whether he is bluffing at all. Maybe he really would be willing to follow through with tariffs and trigger a trade war?

I suspect we’re going to find out the hard way. Because I don’t think China is likely to give in as easily as Colombia, Mexico and Canada did.

The reason why is something very few people understand. And I’m worried Trump himself is in for a very big surprise.

You see, Trump’s threats to tariff China are also justified by fentanyl. Here’s what he posted this on the social media site Truth Social in November last year:

‘I have had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States – But to no avail.

‘Representatives of China told me that they would institute their maximum penalty, that of death, for any drug dealers caught doing this but, unfortunately, they never followed through, and drugs are pouring into our Country, mostly through Mexico, at levels never seen before.

‘Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America. Thank you for your attention to this matter.’

He does have a point, too. The fentanyl issue is wreaking extreme havoc in the US in all sorts of way. But that’s another story.

Today, consider what Trump’s tariffs on China look like from their perspective. Because it’s China’s response to Trump’s fentanyl fuelled tariff threats that I’m so worried about.

Hypocrisy doesn’t quite cover it

To say that opioids like fentanyl are a raw nerve for the Chinese would be the understatement of the last two centuries.

Indeed, the Chinese blame opioids for what they call their ‘Century of Humiliation’. And that mess likely set the scene for China’s subsequent years of even more disastrous isolationist policy under the Communists.

The Century of Humiliation began in 1839 when foreigners effectively ruled China by gunboat diplomacy.

Each time the Chinese tried to start a trade war by expelling the foreigners and their goods, the British Royal Navy would sail their warships up various rivers, right into the middle of Chinese cities. There they’d open their gun ports, ‘out tompians’ and wait politely for the surrender to get delivered.

The destruction of forts and shipping left in their wake was enough to make local mandarins and emperors alike kowtow quick smart and allow foreign goods.

What goods?

Opium.

Yes, history is rhyming.

Not the first Western hegemonic empire with
a trade deficit with China

In the 1800s, the British were buying so much tea from China that they had a severe trade deficit. That was partially caused by China banning foreign goods.

The Chinese only accepted silver as payment for tea. The silver drain soon got out of hand, causing a currency shortage in the British empire. And so the Brits came up with a plan. They’d get the Chinese addicted to smoking India’s opium to rebalance trade.

It worked so well that China’s economy and social harmony fell apart under waves of addicts. But each time the Chinese tried to stem the flow, the Royal Navy politely convinced them otherwise.

British sailors got so sick of having to travel to China to protect the opium trade that they demanded their own harbour. A place we now call Hong Kong.

These days, the roles have partially reversed. The Chinese are giving the West a taste of their own medicine…literally. The Chinese are busy selling vast amounts of smuggled fentanyl into the US. They are also engaging in other trade war practices with their subsidies, tariffs, quotas and exchange rate manipulation.

When all you have is a hammer,
you don’t spot the raw nerve

Trump using the fentanyl trade as his excuse to crack China’s protectionist nut isn’t just awkward. It’s so full of historical allusions that China’s leaders simply won’t be able to give in like Colombia, Mexico and Canada’s did.

If President Trump tries to pursue a trade war with China over fentanyl, he’ll discover the Chinese have a long memory and know how to bare a grudge.

For China, an agreement with Trump brought about by opioid diplomacy would be total and utter humiliation. An admission that another Century of Humiliation has begun…or it never ended.

Trump is about to slam into the trade war foe who cannot back down for loss of face. And he probably doesn’t know it.

He’s expecting China to fold like the Colombians, Mexicans and Canadians did.

Instead, there will be a shocking and surprising retaliation from China that does not simply unwind over the course of a weekend. It’ll stick. And escalate, on both sides. Because the Chinese will feel like he is trying to humiliate them.

The plunge in stocks this week was just an appetiser.

What does this have to do with us?

Well, Australia depends on China’s integration into the global economy. Our exports to China are larger than the next seven countries combined.

Most of this is resources based – a key segment of our economy and trade balance. Which means the Aussie dollar is in even more trouble if China and the US get into a trade war.

Chinese demand also bids up our property market. Funnily enough, with a lot of money that needs to be laundered from the fentanyl trade…

And our politicians rely on Chinese money to pay for their luxuries on campaigns.

We learned during the pandemic what happens when you poke the dragon. Australia led the international community in demanding more information about the plight of the Uighurs in Xinjiang and the origins of COVID-19.

We got sanctioned for it. Affected stocks fell.

I think it’s time to prepare for round two. And it’ll be far, far worse.

One of the best escapes for investors? Gold.

And potentially this narrow segment of the gold miner market.

Regards,

Nick Hubble,
Editor, Strategic Intelligence Australia