by Jody Chudley of Daily Reckoning
President Trump is clearly not afraid of confrontation, especially when he holds a distinct advantage.
And right now, in his ever-escalating trade war with China, Trump clearly holds a distinct advantage.
That advantage is that China sells a lot more stuff to the United States than the United States sells to China.
In 2017, China exported $506 billion to the United States while the U.S. exported only $130 billion to China.1 That means that while China can levy tariffs on $130 billion of goods coming in from the United States, President Trump can slap tariffs on $506 billion worth of Chinese goods — hundreds of billions more.
That isn’t a fair fight.
Before President Trump assumes victory however, there is another issue to consider…
China Has A Heavy Metal Ace Up Its Sleeve
Neodymium, ytterbium, gadolinium, dysprosium, erbium, holmium, lutetium and promethium.
Don’t worry, my keyboard is working fine.
Yes I’m still speaking English, and no, I’m not casting an evil spell on you.
Those strange words that I typed are actually a list of rare earth metals. You probably haven’t heard of them, but that isn’t because they aren’t important to you.
In fact, these rare earth metals are very important to our entire country.
Rare earth metals play a crucial role in the manufacturing of indispensable everyday consumer items like laptops, smartphones, wind turbines, flat screen televisions and electric car motors.
Perhaps more important, they are also essential to our military since they are used in smart bombs, military radar, satellite communications, night vision goggles, armored vehicles and laser guidance systems.
The United States produces none of these important metals.
By none, I mean zero, zilch, nada.
The U.S. imports 100 percent of the rare earth metals that it uses. And the country that has almost all of these metals is China — the very country that President Trump is aggressively targeting in a trade war.2
All China needs to do is stop shipping these rare earth metals to the United States and we would have some big problems on our hands. A lack of rare earth metals would throw a massive wrench in our high-tech consumer production chain and also our military’s access to advanced weapon system development.
It would be a huge blow to both our economy and the strength of our military.
When it comes to rare earth metals, China is the only game in town. And by town I mean the entire planet…
And the Chinese already have a history of using this stranglehold to their advantage.
In 2009, China and Japan had a little disagreement over two ships that collided in the controversial South China Sea. China responded by shutting off Japan’s rare earth metal supply which promptly sent some metal prices surging more than 20 percent, while severely disrupting the supply chains of some of the world’s largest companies.3
If China was willing to do that over a territorial dispute, it is hard to imagine that they wouldn’t be willing to do in an all-out trade war…
Getting Prepared To Profit From This Situation
If you find yourself thinking that being nearly 100 percent reliant on imports for such important commodities is a national security and economic policy concern, you wouldn’t be alone. The fact that the 100 percent reliance is on one country which we happen to be engaging in a nasty trade war exacerbates the problem exponentially.
You and I can’t do anything to help fix this problem. However, we can get ourselves ready to make some money if China does decide to play this ace that it’s hiding up its sleeve.
China supplies almost 100 percent of these rare earth minerals to the United States. There are, however, some publicly traded companies that produce rare earth minerals as well.
An ETF has been established to track those companies and give investors a way to “get long” rare earth minerals. The ETF is called Market Vectors Rare Earth/Strategic Metals ETF (REMX), and it allows investors to own a basket of companies with rare earth exposure.
REMX currently has 21 different positions in publicly traded companies spread across more than $150 million in investments. No single company represents more than 8.5 percent of the ETF’s assets.
If China decides to try and punish the United States by cutting off our rare earth minerals, the price of those minerals is going to skyrocket as speculators react by hoarding them. If that happens, I believe the group of companies owned by this ETF will be clear beneficiaries.
I hope it doesn’t come to that. But if it does, we now know what to do.
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