Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Trade Tariffs - Trading Barbs Down To The Wire

Politics / Protectionism Mar 23, 2018 - 09:11 PM GMT

By: Brady_Willett

Politics

The opening salvos have been fired and the body count could soon start piling up.  No, I am not talking about the steel and aluminum tariffs announced by Trump a couple of weeks ago (which seemed to be more of a ploy to try and encourage favorable NAFTA/trade negotiations rather than a real act of ‘war’).  Rather, the sides doing battle now are the world’s two biggest economic guns – the U.S. and China!

Trump slaps China with about $60 billion in tariffs CNBC Memorandum
China responds to Trump tariffs with proposed list of 128 US products to target CNBC


While the tariffs announced so far have been smallish contrasted against the $375 billion annual trade deficit the U.S. has with China (as reported by the U.S.), there is the threat that things could escalate quickly.  To be sure, aggressive rhetoric is not only erupting out of Trump, which you would expect, but from China representatives as well.

“This is the first of many. This is number one, but this is the first of many.”  Trump

“China is not afraid of and will not recoil from a trade war. China is confident and capable of facing any challenge….China would fight to the end to defend its own legitimate interests with all necessary measures.”  Statement of the Chinese Embassy in the United States

Given that President Trump has previously pointed to the stock market rally as a celebration of his Presidency, it is a little surprising that he seems oblivious to the negative market movements that have coincided with his quest for tariffs.  It has been 21-days since Trump shocked with “trade wars are good, and easy to win”, and there is scant evidence that any major financial market anywhere is remotely pricing in that trade wars are “good”.  In fact, with U.S. steel stocks being hammered yesterday as still more countries were granted exemptions, Trump has injected volatility into the financial markets by first enacting tariffs and then additional volatility by allowing so many exceptions to the tariffs.

Quite frankly, with the exception of Director of The National Trade Council Peter Navarro, it is difficult to find anyone that works for President Trump that actually believes trade wars are “good”.  Wilbur Ross spent yesterday trying to do some damage control, contending that tariffs are a starting point for negotiations and repeating that the President wants to quickly trim the trade deficit with China by $100 billion.  But exactly how this number comes to fruition as each U.S. tariff is met with opposing tariffs isn’t at all clear.

“There will be some ultimate retaliation [from the Chinese] but I don’t think it’s going to be the end of the earth”  Ross

As if to provide a comedic note to try and calm jittery financial markets, Ross added:

“It Is Not As Though We’re Blowing Them [China] Up…This Is Not Going To Put China Into A Depression. Not Going To Put Us Into A Depression.”

In short, the end goal for the U.S. is to use tariffs as a bargaining chip rather than an actual tool to reduce the trade deficit.  Given that tariff missiles do no explode inside of a vacuum, it remains unclear if this goal can be reached without the brandishing of additional weaponry.

The Ongoing Trade War’s Potential Nightmarish End

While negative market reactions and tit-for-tat trade tariffs make for interesting reading, they alone are unlikely to usher in the next financial calamity.  The reality is that be it currency rigging, government subsidies, or tariffs, “trade wars” are taking place all the time, and none of the tariffs announced to date warrant the type of media frenzy they have created.

This said, if the battle lines continue to be aggressively drawn the real threat is that a miscalculation by either side(s) will escalate the current spat into the land of U.S. debt (or the U.S.’s most important export).  The idea of selling, or threatening to sell, U.S. Treasury Securities to spite a ruthlessly debt hungry (and now tariff starved) United States of America has smoldered to the surface during every major market kerfuffle since 2000, most recently with a report that China’s penchant for U.S. debt was waning.

“Financial markets were jolted Wednesday by a report that China — the biggest foreign holder of U.S. government bonds — could curtail its purchases, a shift that has spooked investors already leery of a rise in interest rates at the start of 2018.”  January 10, 2018

Given that President Trump previously applauded the prospect of a trade war, one can only imagine what would come out Trump’s twitter-mouth if, and more likely when, the foreign threat of selling U.S. Treasuries to combat the U.S.’s new found bravado arises – “you don’t want to own our debt anymore? Fine, I’ll get Powell to print $21 trillion tomorrow…suckers!”

Incidentally, although foreign interests currently hold only $6.2 trillion in U.S. Treasury Securities (TIC)  and China, the largest holder, owns only $1.1 trillion, Trump is probably smart enough to know that if you are going to monetize a few trillion you might as well print the entire $21 trillion and get it over with…

Just as U.S. policy makers have historically railed vocally against trade deficits only to concede that little can be done without unleashing unintended consequences, foreign holders of U.S. debt have criticized USD hegemony but done little to end it for fear of imploding the global economy.  In short, Trump can indeed end trade deficits if he really wants to, and China can definitely end USD hegemony if it really wants to, but neither side is likely to enact their nuclear options given the theory of mutually assured financial destruction.

But while ‘end of the earth’ actions are unlikely from China or the U.S., the threat of such actions is plausible.  And as wild market movements in recent days suggest, the mere mention of weaponizing U.S. debt by anyone could be enough to turn today’s somewhat cordial trade spat into something entirely more vicious.

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in