Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 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