China's Secret Weapon

Summary

• China vs. U.S. on trade is a no-win war neither wants to play.
• In an all-out trade war, the U.S. wins.
• Measures China could take to even its score with the U.S. and what U.S. companies that could get hurt the most if relations sour to the extreme.

China's Plan to World Domination

The Chinese government wants to control its future and that of everybody else at some point in the future. Its leaders are patient enough and smart enough to methodically gain dominance of the global economic order, one industry at a time. Let's review:

China requires that foreign companies desiring to invest in its economy must create joint ventures with Chinese-owned companies and allow access to IP (intellectual property) over the course of the contractual arrangement. At the end of the joint venture, the Chinese company is supposed to relinquish the IP and not use it. But that is not what happens. In practice, the Chinese companies continue to use the IP gained from joint ventures and compete against the foreign companies. The Chinese government looks the other way, thereby indirectly condoning the theft and illegal use of IP worth hundreds of billions in dollar value each year.

Reviewing the China Miracle

The Chinese government also subsidizes Chinese companies in order to allow those companies to offer lower prices, both in China and abroad. The government picks strategic industries to subsidize at the various points in its economic development. First, it was heavy manufacturing, steel, aluminum, construction, and everything else related to infrastructure because China needed to build its own infrastructure of roads, railways, ports, etc. in order to build a foundational base for future economic growth. It brought in the know-how from foreign companies initially, using limited contracts and joint ventures, controlled by Chinese companies for the more technically complex projects until the domestic companies had gained the skill and expertise to build anything. Then, the building began in earnest.

And, of course, all of the huge projects required labor, something of which China has in abundance. But the culture had to be transformed from a rural, agricultural one to an industrialized economy with greater concentration of the population in cities. Fortunately, in China, when the government makes a suggestion, everyone knows that it is best to take the hint, and tens of millions of people uprooted themselves and moved to the cities. It may have been the greatest migration of population in history over such a short time.

Once the infrastructure was in place (to varying degrees by region) and China had carved out a significant share in heavy industry for exporting, it moved to more consumable goods that were easy to produce. Cheap labor, disregard for working conditions or the environment, along with government subsidies enabled China to underprice global competition, one industry after another.

Then, China became even more strategic in its thinking. It went after key natural resources on a global scale until it found itself being turned away by government oversight agencies concerned about allowing foreign ownership of strategic resources. China then focused on rare earth metals.

Not Just Dominating Market But Gaining Outright Control

China also cornered the market in most rare earth elements a few years back by using its position at the time as the swing supplier. It could produce more rare earth elements than it needed domestically so it would flood the global market with excessive supply driving down the price thereby causing the closure of many mines outside of China. Most notably for U.S. investors was the closure of the Mountain Pass mine then owned by Molycorp which spent a lot of money closing down its mining and refining operations.

Then, China decided to restrict the supply of rare earths which resulted in the price rising quickly. Molycorp and other mining companies then spent a lot of money closing, borrowing heavily, to reopen those mines and search for new resources. Billion were spent around the world on mine infrastructure to take advantage of the higher prices. But then, as supply began coming back onto the world markets, China once again flooded the market with cheap supply forcing the prices down and many mines into bankruptcy. Chinese companies then went on a buying spree, picking up many world class rare earth mineral reserves on the cheap. China now accounts for around 95% of world production of rare earth elements.

Rare earth elements are necessary in many electronic devices as well as magnets and military equipment. We can't build missiles, planes or guidance systems without rare earths. We also can't build smart phones. Further rare earth elements are used in alloys to harden and strengthen metals such as steel and aluminum while reducing the overall weight. These are necessary to reduce the weight of cars, trucks and planes in order to improve fuel efficiency. While we're at it, the rare earth metal, cerium, also makes such things and catalytic converters possible to improve emissions from internal combustion engines. Wind turbines require huge magnets which rely on rare earth metals. The list goes on and on.

Next Up Is Cobalt

The problem is that while rare earth metals are in abundant supply on a global scale, those elements rarely occur in concentrations that make mining financially feasible. The Chinese have basically cornered the market and become the only reliable source for resources that are critical to so many products we all take for granted. The latest move by the Chinese companies is an attempt to corner the global market on cobalt. Why is cobalt important? It is necessary for the production of batteries. Everyone is so focused on lithium that they forget that small amounts of cobalt are also necessary to build lithium-ion batteries for smart phones, electronic and hybrid cars, back-up battery systems for facilities, home and the electric grid, as well as many other electronic devices.

The big difference is that there are several sources of lithium buy very limited supplies of cobalt, most of which are located in the Democratic Republic of Congo, much of it mined by hand. China already supplies 85% of the world demand of refined usable cobalt oxides. The other 15% primarily comes from Finland, but the source of the unrefined cobalt is still the Congo.

China has identified another critical resource that it can easily control to take advantage of the coming increase in demand. EV (electronic vehicle) battery demand for cobalt in 2017 was about 26,000 tons. McKinsey, a global consultant, predicts that EV battery demand will increase to 550,000 tons per year by about 2026. The price of cobalt has increased from $26,000 per ton in 2010 to $90,000 per ton today. The increased demand combined with limited supply options means that the price could go stratospheric in coming years. Controlling the supply of such a critical resource could put China in control of several more growth industries. If the EV adoption worldwide goes as projected, China could require all automakers to build their cars in China. That is essentially what it did with many electronic manufacturers using its strangle on rare earth elements.

So, the point to this potential trade war is much more far reaching that the media has explained. If America continues to sit on its hands, as our presidents have done over the past two decades, our military and many of our manufacturing companies will become solely dependent upon China for strategically critical materials. We would not be able to build fuel efficient cars, trucks or buses. Nor would we be able to build planes and defense systems to defend ourselves without permission from China. That doesn't make me feel safe in terms of national defense or world peace.

The new China policy of making the country 80% self reliant by 2025 would require even more free trade violations. China wants to become the world leader in innovation and will do so if unimpeded by the rest of the world through its "Made in China 2025" initiative. Included in that article is a list of the ten industries that China wants to dominate by 2025. I will say, they do dream big in China. And if that dream comes to fruition, it will undermine the rest of the free world and make China the largest economic power on the face of the globe, controlling nearly everything of importance to life as we know it.

As to its continued dependence on gaining access to foreign IP, here is a quote from that article that I believe sums it up pretty well: "Despite advances it has made in hi-tech industries, China still depends on foreign technology transfer to push forward its own innovation agenda and next-generation manufacturing goals. As such, analysts said US tariff measures could hurt the implementation of China's 2025 goals."

In other words, China cannot attain its goals without continuing to double-dealing with the rest of the world on trade and IP matters.

Outcomes of an All-Out Trade War

We can really only speculate on how a trade war would unfold, of course, but my sense (and logical conclusion) is that China would end up worse off than the U.S. in the end were a trade war to escalate.

China does own a lot of U.S. debt. It could flood the bond markets and cause the USD (U.S. dollar) to lose value. But that would also end up artificially lowering interest rates in the U.S., as well. U.S. debt would become cheaper to service and keep our deficits from spiraling higher. A lower valued USD would also make U.S. goods more price competitive on the world market enabling U.S. companies to sell more, also helping our economy.

On the reverse side of this scale, what would China hold in its reserves if not USD? It would need to buy other currencies to add to its reserves. Its currency would rise relative to the USD, as would other currencies it exchanged its reserves into, all of which would make U.S. products cheaper practically everywhere else in the world. With tax reform in place and regulations being rolled back, manufacturing in the U.S. could make a nice comeback.

Inflation in the U.S. would rise as raw materials and finished imported goods would cost more in USD terms. The higher cost of imports could lead to more essential products being made in America. It is cheaper to use a deflated USD to buy raw materials and then do the value added processing here than to import higher cost finished products from afar. Robotics would need to be deployed extensively to make up for the lack of sufficient labor.

The Big Stick: WTO Membership

Yes, there would undoubtedly be pain on our end. But the pain in China could be much worse. If China does not mend its ways, a trade war will come. It was a mistake to admit China to the WTO (World Trade Organization) without preconditions. The biggest stick of all would be to kick China out of the WTO unless it opens up its economy, stops allowing the theft of IP, and plays fair with trading partners.

It loses roughly 90% of complaints lodged against it through the WTO. This would seem for many to be the best means of solving disputes with China. Unfortunately, China may agree to comply with WTO resolutions on paper but then rarely implements that to which it has agreed. When it does other barriers are erected to maintain Chinese domestic companies' dominance. The WTO works well in the interest of global trade with most developed countries in the world but has been ineffectual in dealing with China.

There needs to be a more united front by the rest of the developed world. I believe there need to be conditions that must be met by a specific deadline. The prize for China: to be allowed to continue to be recognized by the members of the WTO. If not, they get booted which would do tremendous damage to China's economy. I really think it is the only leverage the world has to force China to play fair. And I also believe that this is the most likely outcome of an unbridled trade war.

China would face high tariffs for its goods throughout the world. Its exports would fall precipitously and never recover. It would end up becoming a next importing economy, and its reserves would dwindle. Its glorious dream of One Belt, One Road would have to be scrapped. It would become more isolated. All of these things are too important for China to risk.

The alternative is to let China keep bullying its way to economic dominance and in control of all critical materials needed by strategic industries on a global scale. Any nation wanting to defend itself would need China to allow it do so. That is not a world of free trade that the globalist view desires. It is not the path any free and independent nation can afford to allow the world to continue down.

China's Secret Weapon

There is this one huge advantage that China has which is not present in any other major economy in the world. If our government wanted us to boycott a product, it would need a good reason like safety issues to get a majority of its citizens to follow such an edict. However, in China, if the government tells its people to boycott a product, especially a foreign made product, compliance is nearly 100%. Those who don't comply with a government edict could face penalties.

It has been written that Tesla (TSLA) would be the biggest winner if China opened up its auto market to imports; something President Xi recently promised to do. But that would only be the case if the government wanted Tesla to be the big winner and sell more cars in China. If not, it could announce a boycott of Tesla autos. To take it further, local police could pull over Tesla drivers and issue citations based upon the government edict. I am not trying to indicate that I believe this will happen, merely that it could. Government control in China is just that pervasive.

So, the secret weapon is its government's ability to control behavior. A good example is the boycott of the South Korean tourism industry which cost that country an estimated $6.8 billion in 2017. The boycott extended beyond tourism to car making and other industries. Four other modern day boycotts against the U.S., Norway, Japan, and France have taken their toll. But these were far smaller in scale than what we could expect from China if it thinks that it has had to give up too much in negotiations (a fair bet at this point).

Companies That Could See Damage In A Chinese Retaliation

So, which U.S. companies are likely to lose the most in such a scenario? Let's take a look at which U.S. companies generate the highest percentage of revenues from China. You may be surprised to find that some of those companies with the greatest exposure are from the technology sector. This list was the most recent I could find (based upon 2015 reported revenue) and comes from Quartz at qz.com.

Company (Ticker Symbol)	Revenue Exposure to China (%)
Skyworks Solutions (SWKS)	83%
Wynn Resorts (WYNN)	70%
Qualcomm (QCOM)	61%
Broadcom (AVGO)	55%
Micron Technologies (MU)	55%
NVIDIA (NVDA)	54%
Yum Brands (YUM)	52%
Applied Materials (AMAT)	48%
Texas Instruments (TXN)	44%
Microchip Technology (MCHP)	42%
Lam Research (Lam)	36%
Intel (INTC)	36%

Click to enlarge

U.S.-based companies experiencing strong revenue growth in China that could also be hurt by product boycotts or tariffs include Nike (NKE), Apple (AAPL), Starbucks (SBUX), Tesla (TSLA) and Tapestry (TPR) which was formerly known as Coach. A few other names proffered by my friends and fellow Seeking Alpha members (Mercy and Mayascribe) are: McDonalds (MCD), Boeing (BA), General Electric (GE), United Technologies (UTX), Caterpillar (CAT), Las Vega Brands (LVS), General Motors (GM), Wayfair (W) and Advanced Micro Devices (AMD). All have significant exposure to China and investors who own these stocks should keep a sharp eye glued to the trade issue.

On the flip side, Chinese companies that may find growth hampered by China being excluded from the WTO include: Alibaba (BABA), Weibo (WB), Ten Cent (OTCPK:TCEHY), BYD (BYD), YY, (YY), and Baidu (BIDU) just to name a few of the more recognizable names. And then, there are other foreign multinationals such as Johnson Controls (JCI) that do a ton of business in China. How will they fare? It is hard to say at this juncture as there is not telling what nations, if any, will support the U.S. position if/when a trade war were to ensue.

Another great article by another author with a slightly different point of view is "Everything You Need To Know About The Possible Coming Trade War," by Dividend Sensei. It is well written and provides more insight to other aspects of a potential trade war. I was already in the process of writing this article when I came across it but decided that there was something more to be said.

If you have any questions, please feel free to ask them in the comment section below and don't forget to hit the "Follow" button next to my name at the top of this article. For those who would like to learn more about my investment philosophy, please consider reading my original series "How I Created My Own Portfolio Over a Lifetime".

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long BA, AAPL, UTX, BABA, YY, TXN, YUM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Comments

[DING.]

More and more foreign businessmen are investing in China.

[johndoe1400]

My thoughts exactly. Well done in putting them in writing.

[dawgydaddy]

Your macro analysis has one flaw. When/if China dumps its treasuries the value of treasuries will go down due to supply and demand, as in supply will be massively higher than demand. That’s all well and good except the US govt has to sell $90B in new treasuries every month plus new debt to cover all retired treasuries during the month. That may well drop the value of the dollar but it’s also going to cause an enormous spike in treasury yields. That will crash the stock market, put the government in a debt squeeze that makes Tesla look solvent, cause all existing bonds to drop precipitously in value etc - essentially all of the foolish debt spending for porkulus and so-called entitlement programs will come home to roost. In the short to medium term that will be incredibly painful for a lot of people in the US. In the long term it would likely be a positive thing since people might realize how stupid we’ve been and get on a path of fiscal responsibility, and crush China as an added bonus. But it will never happen because the US govt is structurally incapable of long term thinking. That’s why we’re in the mess we’re in now. Without the intestinal fortitude to weather that crisis, the US cannot play a trade war all the way to the end game, and that’s the only way to beat the Chinese. Therefore, we’ll fold on the flop. And the Chinese know it. If we don’t fold, then the place to be is in non-dollar denominated assets. Not stocks not bonds not treasuries not USD cash. Wait for the blood to stop flowing and then the buy in at that point will be the biggest profit opportunity the world has ever seen. But don’t get excited because we’ll fold.

[alpine]

For some of us like me, you should have "folded" when the big crash happened in 2006/7/8 and done a big nationwide restructuring like what the PIGS countries went thru, esp. entitlement reform.

That would have freed USA of being reliant on China and others to keep feeding the UST bloat, and likely also robbed the world of massive opportunities in the USA and indeed, around the world on a huge infrastructure build programme that the world had never seen.

It all seems too little too late, but then again, could this time, with your current POTUS, could he "not fold?"

[D-inv]

"When/if China dumps its treasuries" U.S. imports from China STOP, Fx rates fluctuate wildly, China attempts to direct those exports to other markets antagonize other countries, bankruptcies and unemployment soar in multiple countries. Everyone loses, INCLUDING CHINA.

[Mathieu Malecot]

it is not a fact that supply will outstrip demand, especially considering a generation leaving a volatile stock market and looking for guaranteed fixed income. if the US people buy these bonds, then the amount due is paid to future generations. Again, anything the US does that is "long term" is discounted or called out for it's impact in the short term. Any mistake China makes get the "long term" label applied to it, even when the long term ramifications are at best unclear.

VIEs are a terrible detriment to China, and keep its people unproductive. See per capita GDP.

[Bruce Bohannon]

Nice article Mark. Thank you.

[Old Wizard]

Also price of bonds go down which represents a loss to the seller. A big sale of bonds doesn’t affect the interest actually paid on the bonds. The yield at any given time reflects the ratio of that interest to the price paid for the bond. A fire sale by China diesn’t affect the interest the USA must pay, but it could affect the US’s ability to borrow addional money and have to pay a higher interest rate on future bonds. There would not be a big advantage to China if they would sell US bonds at less than face value.

[Mark Bern, CFA]

Absolutely true, imho, Old Wizard. And I don't thing that the impact would be that great or long lasting. The bond market is about double the size of the stock market and the daily dollar volume of bonds traded daily is about $700 billion. U.S. Treasury auctions are generally unable to meet demand so I would expect the sale of bonds by China to be absorbed in a relatively short period of time. Also, it would not solve China's problem in that it would still own US dollars received in exchange for the bonds. After taking a loss on the bonds it would then own non-interest bearing currency that, if it converted that to other currencies would then weaken the USD relative to other currencies making U.S. products cheaper to export on the world market; something China would not want.

[heung]

Mark , can I ask you the rudimentary of economics in this article. If chin sell us bond , bond price will be lowered then bond yield will be higher . US burden will be higher on their debt . Can you enlighten me on this ?

[Mark Bern, CFA]

You make a good point. If they cannot find buyers the bonds China would be selling would have to be discounted which would raise the yield. China would have to take a huge loss to sell the bonds.
I suspect that the Fed would step in as a buyer if the price dropped enough. It would enable the U.S. to buy back its debt at a steep discount. The excess interest income earned by the Fed would be turned over to the Treasury. I also suspect that when the bonds mature the Fed would collect the full amount but then turn around and return the excess to the Treasury reducing the U.S. debt in the process.
I can't imagine that the Fed would not step in to maintain control of interest rates if necessary. However, there is still such strong demand for U.S. Treasuries that I doubt the supply would overwhelm the market. I suspect that the bonds would be absorbed by the market in a matter of weeks. Then all would go back to normal for the U.S. In other words, I believe the volatility in yields would be very temporary.

[D-inv]

heung, China runs a massive trade deficit with the U.S. and in doing so accepts $U.S. in payment for their exports. As long as that continues, the Chinese exporters have the choice of investing in $US-denominated assets, using the $US in purchasing imports or converting their $US into other currencies (including their local currency (Yuan/Renimbi?)). Converting their $US into other currencies puts downward pressure on $US exchange rate and upward pressure on the purchased currency.

Where chinese exporters want to convert their $US export revenues into local currencies, Chinese authorities can neutralize $US. exchange rate pressures by purchasing and holding U.S. Treasury securities. Should China decide to stop buying U.S. Treasuries or to dump their existing Treasury holdings on the market, the $US would depreciate relative to the Chinese and other currencies. Assuming markets are allowed to operate Chinese exports to the U.S. would fall, U.S. exports to China and China-linked economies would rise and U.S. imports would decline.

China cannot change it's U.S. Treasury security investment/holdings policy without affecting international trade patterns and it's own domestic economic performance.

[Windwood Trader]

Institutional and mutual fund ownership is 99.3% of the float of $YY.

T. Rowe Price and Black Rock alone have 11% of the outstanding. If one of those whales decides to sell or buy the boat will rock.

WT

[Mayascribe]

seyi23600: YY and pretty much every China equity is suffering from sentiment change. Suggest for you to take a gander at $KWEB. It's holdings, which include YY, are pretty much all down.

Then there's chips/card, all suffering the same. Bargains coming, maybe, but for now, at least for me, I'm staying away.

[Mark Bern, CFA]

Maya - Your sentiment is what I am trying to explain. Thanks for sharing. One reason YY is down is due to investor sentiment in the U.S. since it is listed here.

seyi - I am not saying that the companies listed in the article are to be avoided forever, merely that if a trade war were to break out that these are stocks that could get hurt. My point is that caution by U.S. and other investors could hurt these stocks until the political and trade climates settle down.

[seyi23600]

yy has nothing to do with trade. tell me how does a chinese Live streaming company that only operates in China be affected by trade wars.

[Mark Bern, CFA]

If you go to slide 15 of the company presentation you will see that the company intends to expand overseas. A trade war could hamper such ambitions. One of its greatest strengths is its scalability.

[mykool_04]

Trades for Tomorrow: Micron Stock

$50 was a key level in Micron Technology, Inc. (NASDAQ: MU ) that many investors were watching. It looked like an obvious bounce trade in early April after a selloff from $62 despite strong earnings. The bounce played out early, sucking in new investors looking for a payout. The market (as if on queue) flushed out a number of traders by plunging MU stock down to $48, running stop-loss orders all along the way.

What now? As you can see at the bottom of the chart (in yellow), momentum is starting to turn, favoring the bulls. Micron's strong rally on Wednesday pushed the stock above $54, a critical move now that shares are above that level of resistance (blue line). The hope for bulls is that Micron stock is flat or higher on Thursday and eventually finds $54 as support rather than resistance

[Old Wizard]

Zhe, you are living in a parallel world. When I point out that China has consistently hacked into the R&D of our technical companies and has a virtual monopoly on heavy earth element and processed cobalt supply you don’t seem to process those implications at all. Heavy earth elements and processed cobalt are very important in the manufacture of batteries and energy conversion for windmills and hybrid cars. If we couple the supply of these two commodities with a world dominant supply of steel, China has an ominous position relative to high tech and defense/ aircraft based commodity supply.
Further, our high tech driven economy must produce product domestically in order for this democracy to be stable. It must put our people to work and provide socio economic mobility tip and down the classes lest there be a larger and larger segment of our population trapped in the lower class. This is both economically an unsustainable state given our welfare system and not consistent with what has separated the USA from much of the rest of the world.

[Lee Briggs]

Chinese baby formula producers were replacing soy protein with melamine powder an extremely potent poison plastic material used to produce Melamine dishware. The baby formula was sold mainly in Asian countries and all over the world. Some of it almost made if into the American market but it was stopped and tested at the border with early news that babies in China, Vietnam and Cambodia were dying and linked to the formula.

Recently there was Chinese rice sold to Vietnam, Cambodia, Laos, and Thailand that looked and cooked like rice but also was melamine. Many adults got sick and were diagnosed with kidney failure and other problems, the lucky ones died quickly. Some of this rice supposedly made it into the Los Angeles Asian community here in the USA.

Sounds like China's business ethics are learning from US companies like Monsanto but aren't going about things quite as smartly.

[Kiisu Buraun]

Lee,

"Chinese baby formula producers were replacing soy protein with melamine powder an extremely potent poison plastic material used to produce Melamine dishware."

=> Your comment triggered memories of articles I read a few years ago ...

(2007 / 2008)

"Diethylene glycol, a poisonous ingredient in some antifreeze, has been found in 6,000 tubes of toothpaste in Panama, and customs officials there said yesterday that the product appeared to have originated in China.
...
Diethylene glycol is the same poison that the Panamanian government inadvertently mixed into cold medicine last year, killing at least 100 people. Records show that in that episode the poison, falsely labeled as glycerin, a harmless syrup, also originated in China.
...
Two weeks ago, The New York Times reported that a Chinese factory not certified to make pharmaceutical ingredients had sold 46 barrels of syrup containing diethylene glycol that had been falsely labeled as 99.5 percent pure glycerin. That syrup passed through several trading companies before ending up in Panama, where it was mixed into 260,000 bottles of cold medicine.

At least 100 people died as a direct result, according to Dimas Guevara, a Panamanian prosecutor who is leading the investigation into the deaths."[1]

Also ...

"Toxic syrup [diethylene glycol] has figured in at least eight mass poisonings around the world in the past two decades. Researchers estimate that thousands have died. In many cases, the precise origin of the poison has never been determined. But records and interviews show that in three of the last four cases it was made in China, a major source of counterfeit drugs.
...
Beyond Panama and China, toxic syrup has caused mass poisonings in Haiti, Bangladesh, Argentina, Nigeria and twice in India.
...
When at least 88 children died in Haiti a decade ago, F.D.A. investigators traced the poison to the Manchurian city of Dalian, but their attempts to visit the suspected manufacturer were repeatedly blocked by Chinese officials, according to internal State Department records. Permission was granted more than a year later, but by then the plant had moved and its records had been destroyed."[2]

Here in the US ...

"Federal drug regulators, in announcing Wednesday that the mystery contaminant in heparin was an inexpensive, unapproved ingredient altered to mimic the real thing, moved closer to concluding that Americans might be the latest victims of lethal Chinese drug counterfeiting.

The finding by the Food and Drug Administration culminated a worldwide race to identify the substance discovered early this month in certain batches of heparin, the blood-thinning drug that had been linked to 19 deaths in the United States and hundreds of allergic reactions.
...
The F.D.A. said it had found the contaminated heparin at Changzhou SPL, the Chinese plant that supplies the active ingredient to Baxter. Changzhou in turn buys its heparin from two companies, called consolidators, that gather crude heparin from workshops that make it from pig intestines.
...
So far, Ms. Gardiner said Baxter’s investigators had been denied access to the consolidators and workshops. “We will continue to seek access.”"[3]

And ...

"China has in recent years exported poisonous toothpaste, lead-painted toys, toxic pet food, tainted fish and now, contaminated medicine.
...
China has lurched between defensiveness and cooperation on issues of product safety. Last year, it initially blocked the F.D.A. from investigating tainted pet food and accused foreign forces of exaggerating the issue. Then in July, China said that it had executed its former top food and drug regulator for taking bribes and promised reforms.
...
At its present inspection pace, the F.D.A. would need at least 27 years to inspect every foreign medical device plant that exports to the United States, 13 years to check every foreign drug plant and 1,900 years to examine every foreign food plant."[4]

More recently (2016) ...

"Using a stringent two test method, researchers have found that 32 out of 32 traditional Chinese medicines tested were contaminated with mercury and arsenic.
...
The results from these tests showed the presence of arsenic and mercury in all samples. Additionally, the results showed that medicines with identical names but different places of production had considerably inconsistent concentrations of these hazardous elements."[5]

Also in 2016 and related to the death of Prince ...

"“It seems more and more likely that Prince became a casualty of what is being called a new national crisis of deadly counterfeit pills,” the Star Tribune wrote. Synthetic drugs like fentanyl and flakka from Chinese labs have flooded the US in recent years, in part because drug companies in China openly offer the raw materials to make them and drug import and export laws are easy to circumvent.

Illegal Chinese labs have been tweaking chemical compositions of fentanyl and other synthetic drugs to get around China’s export laws and the US’s import rules, by altering the molecular composition slightly. Hundreds of thousands of counterfeit pills containing potentially lethal doses of fentanyl and other synthetic drugs have entered the US, from labs in China that are “mass-producing” the pills, the DEA said last month."[6]

There's more[7] ...

Best wishes,

Kiisu
1. (NYT) https://nyti.ms/2HaIIe5 Similar report from the UK https://bbc.in/2qFGWev
2. (NYT) https://nyti.ms/2HbOVq7
3. (NYT) https://nyti.ms/2HqY15N
4. (NYT) https://nyti.ms/2qL7tqi
5. (AsiaSci) http://bit.ly/2Hv55hv See Toxicological & Environmental Chemistry abstract at: http://bit.ly/2H8Dakc
6. (QZ) http://bit.ly/2HAhukn
7. (OECD) In 2013 more than 63% of fake goods originated in China and more than 21% originated in Hong Kong (totaling nearly 85% of all goods seized) http://bit.ly/2qL7vOW

[villagebum]

Xhe
“China does like to brainwash it’s own people to boycott Korean tourism, big deal!”
It’s a big deal, it’s China’s secret weapon when it comes to trade war or any other conflicts with the U.S. for that matter. The Chinese blogs were plastered with boycotting American product messages when Trump first purposed the 25% tariffs on Chinese imports. Americans would still buy Chinese imports even if they are more expensive after the tariffs are imposed albeit we maybe buying a little less of it, but the Chinese consumers would totally boycott all American products and all American companies that do business in China at the hints (advices) of their government. Korean Lotte Group is being driven to the brink of bankruptcy because of their decision to give their land to install Thaad defense system, all of Lotte supermarkets in China see a drop of 90% in business. I don’t see the benefits of trading with China in the long run.

[xhe2009]

Yes, China brain washed their own people to boycott Korean goods including touring in South Korea. The government propaganda says Thaad is a powerful missile system that can attack China more accurately. Although Korean consumer products were boycotted, the Korean cars and cell phones are unstoppable in China. People in China dislike Koreans much more than Americans. It’s impossible to boycott good American products. Besides, China cannot survive without US high tech products. Therefore, they will not boycott US products unless US resumes the relationship with Taiwan and supports Taiwan independence. Or open fire on PLA Navi fleets and start a war with China. If so, whoever started the war may be the jeopardize humanitarian of the whole world, which is the most stupid and criminal decision to make. By the way, gaining low tech labor manufacturing back in the States is also unwise. The wise decision should be let China be the word factory, but keep the US a world engineering and high tech center. The lazy US borns who hate study and love being labors can go join China.

[PTR1234]

You mean China has also copied Fox News!! Who would have thought that? At least they don't have a desk in the WH at least not yet.

[TomPendergast]

Even if your assertion is correct that "The government propaganda says Thaad is a powerful missile system that can attack China more accurately", officers of the PLA wouldn't believe it. They know that THAAD is a defensive weapon that carries no warhead so it could not possibly be used for offensive attacks. They know that it can only knock out incoming missiles on their descent (near their target), not on their ascent (near the launch site).

[DING.]

A business are true Significance with passion and dedication to help other people. In order to get higher quality and accuracy product, it is necessary to improve automatic assembly technology.

[D-inv]

Excellent article, Mark.

[Windwood Trader]

China a big customer for Micron- Bad news for them if trade war escalates.

WT

[kellyenfield]

Anyone: why hasn’t MU price not rally when nasdaq, Russell averageshave ran up?

[xhe2009]

You exaggerate the power of China about taking advantages of the global market. If the problem is only about rare earth metals, you can deal with China in regards to the subject. You described China as a powerful and well organized government able to take down any businesses in the world. That is not true. Certainly many big companies love Chinese market as well as their cheap labor so that they love to share their manufacturing technology including IP with Chinese to be convenient. For example, iPhones were made in China, but none of the Chinese phones can compete with iPhones. iPhone also were made by Samsung before, who did steal AAPL IP and had legal issues going on. That means IP issues could happen else where not necessarily in China. China does like to brainwash its own people to boycott Korean tourism, big deal! Your comment on Chinese police panelizes anyone who drives a boycotted car is unreasonable. How could the driver buy the car in the first place if the car is banned in Chinese auto market? Your exaggeration discredited your article, thus it is biased and not convincible.

[Old Wizard]

I was referring to the article you referenced. Your article makes the points that I made when I commented on the article you referenced. Your points are well taken. Whether WTO rules against China or not isn’t significant. What is significant is whether China follows the rules before and after any WTO ruling. The article you referred to didn’t see any problem with ?China producing 62% of the world’s steel, 95% of the world’s supply of heavy rare earth elements, a large part of the processed cobalt and their strategy to build artificial islands that potentially would allow them to claim natural resources in areas far from their home waters and control the sea lanes of trade in the South China Sea,
Hacking into our advanced technology was seen as equivalent to copying our products. I consider that article as really naive.

[Mark Bern, CFA]

Old Wizard,

Thank you for confirming what I thought, but I did not want to make assumptions. I wrote this article to shed light on a different perspective of the same problem because, while that other article contain a lot of good information I felt there was much left out that needed to be said.

[Old Wizard]

I read the article and commented accordingly. It did not cover the strangle hold that China has on certain critical commodities and seemed to conclude that when a product became a commodity it was the inevitable result that it would be produced where it was cheapest. I pointed out that the hacking into our companis’ R&D and the stealing of IP are a different issue.
The article supported going to the WTO to get China penalized when they break the rules. I offered the opinion that China has not confiormed to WTO rules since they became a member. I used their hacking into our domestic contractor to get the F35 specifications, in which our country has invested billions and represents leading edge defense technology,
Still the free traders keep saying what we have been doing is better than the possibility of some pain over a possible trade war. I maintain that what we have been doing isn’t good enough and your example of the heavy earth element evolution is a case in point . We didn’t learn anything by signing up to the Paris agreement where we were to commit to even more stringent environmental rules while China got a pass to keep doing what they have been doing. The mining of heavy earth elements carries with it the attendent pollution of large amounts of water. China has a vast lake of polluted water which is growing. If we were to permit large scale mining of these elements we would require much more stringent environmental restrictions and the cost would be so much greater, For readers and commenters of the other article you reference, get the picture as we project the limit in the future. Instead of wringing your hands about a trade war with China, what is your prescription for beneficial change, it clearly isn’t using the WTO and doing what we have been doing.

[Mark Bern, CFA]

Old Wizard,

Are you commenting on this article or the one linked within the article? Because this article does not considered following the WTO rules as the solution. I believe I made it clear that the best use of the WTO would be to kick China out which would result if tariffs on Chinese goods throughout the world.

The Chinese have lost in WTO court many times and agreed to change but the changes never come.

[sonchi]

According to the following article, what you wrote about WTO complaints is not true/accurate (the third point that is not true/accurate, I pointed out the other two above):

http://bit.ly/2HFZNxp

"Trump Wrong About WTO Record

By Robert Farley

Posted on October 27, 2017

When it comes to litigation brought to the World Trade Organization for dispute resolution, the U.S. wins the vast majority of cases it brings, and it loses most of the cases brought against it. That’s generally how other countries fare before the WTO as well."

[user 18159032]

sonchi: We would not want to confuse the issue with the facts. Shame on you.