Trade War - Round One

It is hardly a secret that China has long engaged in imbalanced trade practices and has earned a reputation for raising the theft of intellectual property to an art form. 

What is Donald Trump to do?

Last week the Trump administration acted with a call for 25 percent duties on 1,300 some-odd Chinese imports valued at $50 billion. 

In less than a half day Thursday, in a tit-for-tat response, China retaliated with its own list of similar duties on key American imports including corn, soybeans, beef, pork, automobiles, aircraft and chemicals. 

 

This was followed with the overnight tweet storm that the United States would expand trade duties on an additional $100 billion of Chinese imports.

 

Predictably, investment markets Friday reacted with a really bad case of indigestion.   

What are the Chinese to do?   

 

The brutal honest truth is that they are going to be stretched to find $100 billion of goods and services to tariff in response.  Furthermore and unable to feed their own masses much of what China imports from the United States is food.  Yup, corn, soybeans, beef and pork. Jamming-up the grocery pipeline could inflict serious harm on the Chinese populace.  It is an immutable fact that the world market cannot replace the basic food staples imported from the US. 

Some of you readers have likely heard about the ‘Guns and Butter’ economic theorem.  It is also an immutable fact that food shortages can lead to social and political instability.  Something (ahem) a totalitarian regime is loath to invite upon itself.

What else can China do? 

Curiously, Chinese officials have not publicly shown any interest in bringing their biggest bargaining chip to the table. This would be their vast holdings of U.S. Treasuries. 

China holds somewhere around $1.17 trillion of United Sates Treasuries making it the largest of our foreign creditors - second only to the Federal Reserve.  Some might suggest that if China wanted to inflict serious harm on the United States in an all-out, no-holds-barred trade war they could simply begin to dump their Treasury holdings.   Really bad pain and disruption of US finances would follow.  Or would it? 

First of all what are the Chinese going to replace their Treasuries with?  Lower yielding Japanese and European debt?  Furthermore, a fire sale might cause treasuries to plunge in value leaving the Chinese with little to show for their efforts.

So what are we to do?

Without a doubt, if the tit-for-tat escalates there is plenty of opportunity – both here and abroad – to inflict serious harm upon people, businesses, securities markets and currencies.  The collateral damage could be manifest.  Which country is prepared to endure the short-term pain versus the rewards of enduring long game pain is anybody's guess.

 

My thought is to stock-up on microwave popcorn, frosty adult beverages and enjoy the circus.  With a nod to H.L. Mencken - observing the Trump administration is much akin to observing someone running the circus from the monkey cage.   

Cheers!