- United States aim to curb the economic rise of the China with tariffs, sanctions and technological restrictions, while theEurope seeks a balance between strategy and commercial interests. Beijing, however, has a powerful card: the control of lands rare, essential for cars, armaments and advanced technologies. The result? The much-invoked "decoupling" is turning into an ongoing negotiation, which however yesterday saw an agreement in principle between the US and China in London. But it is precisely this uncertainty managed, combined with solid global growth and controlled inflation, reassure the markets. At least for now.
In the latest episode of the podcast “On the 4th floor", Alessandro Fugnoli, strategist at Kairos Partners, takes stock of the “challenging divorce” from China and explains why markets seem to like this situation.
The “challenging divorce” from China
In recent years, the strategic priority of the United States has been clear: contain China. As Fugnoli points out: “China produces too much, saves too much, grows too much, exports too much and we must slow down its progress if we want to avoid America’s global primacy being threatened and eroded day after day”.
THEEurope, instead, is moving on more delicate ground. “It exports a lot to China and does not want to lose such an important market, especially now that the American market is becoming more closed and less profitable,” explains Fugnoli. However, Europe also shares the American strategy, made up of watchwords such as decoupling e derisking, that is, gradually distance ourselves and reduce the economic risks associated with China.
Duties, rare earths and industrial “divorce”
Remember Trump's election campaign? Duties at 60%, then increased to 130%, then dropped to a more “diplomatic” 30% after negotiations with the Chinese in Switzerland. Fugnoli comments with a hint of irony: “It wasn’t real peace, however, nor even an armistice, so much so that the two sides almost immediately started provoking each other again. America increased the scope of its sanctions on high-tech products, while China resorted to its strategic weapon, the blockade of the export of rare earths”.
The infamous Rare lands: critical materials for modern technology, produced almost exclusively by China, what about Control the entire supply chain, from processing to export. Even if these resources cost “only” a hundred euros per kilo, transforming them requires complex and polluting procedures, of which only Beijing today has the know-how. “For the West to equip itself with these procedures it will take at least five years, some say even double,” warns Fugnoli. In the meantime, our industry, from cars to armaments, risks having to give in to Chinese economic blackmail “since our supplies are at a minimum,” the strategist points out.
A common front and ongoing negotiations
On the diplomatic front, however, the United States seems to be playing its cards well. It has built a common front with key countries, fromIndia ai Arab countries, and keep Europe and Japan in their sphere of influence. “The Chinese rare earth weapon is formidable and the Chinese will try to maximize its effect,” confirms Fugnoli, but it will be managed as a lever, with flexible licenses, exactly as America does with semiconductors and advanced technologies.
The result? "Rare earths and semiconductors are like children in a divorce case. They will force former partners to stay in touch and not give in to too much aggression and resentment. Everything will have to be negotiated not just once but continuously."
Quiet markets but keep an eye on the future
when means all this for the markets? Fugnoli is rather optimistic: Global growth is positive everywhere, with America accelerating, Europe set to regain momentum next year and China with expansionary measures ready to go.
In addition, theinflation seems under control, allowing central banks to lower interest rates. “What was feared in April, namely a sharp slowdown in international trade, empty shelves in department stores, a rush to hoard and a sharp rise in prices, well, there is no sign of all this yet and if there has been no sign up until now there won’t be much in the coming weeks either.”
Sure, the challenges there is no shortage: "Thus, once the fears of stagflation have been scaled down, in some time, those of inflation will probably reappear. Everyone is in fact pushing on the fiscal accelerator, almost everyone also on the monetary one. On the other hand, however, immigration to the United States has been blocked. Producing more with fewer people, if it is not supported by an increase in productivity, can produce wage inflation", explains the strategist.
For now, however, bags e bond they stay on sustainable levels. In short, the “divorce” with China is challenging, but at least for the markets, it seems better than remaining in a cohabitation that is too turbulent.
