Trump warns China about negotiating a trade deal in his second term
Trump said on Saturday that he would work to eliminate the trade deficit with China. He warned that any trade deal negotiated in his second term would be far worse than any reached now. He said the Chinese should not daydream about his being defeated in the 2020 election so that they might negotiate a better deal with a Democratic president. This is typical arrogance and another attempt to bully the Chinese into signing a deal now. It is unlikely to work but it has caused all sorts of worries for investors and caused stock markets to crash.
The US advantage and China’s treasury bills
Trump has continually boasted that the trade deficit estimated to have reached $220 billion in 2018 gives the US a huge advantage when it comes to the trade war. He thinks the US can effectively wait out China as it loses billions while the US collects tariffs.
However, the South China Post points out that China has ways to punish the US for its actions over and above itself increasing tariffs on US imported goods. China holds a massive $1.123 trillion in US Treasury bills.
What if China dumped their US Treasury bills onto the market?
If China dumped its US debt on the market this would depress US bond prices and force the US government to substantially increase yields. This would make loans to US companies and also private borrowers more expensive and could cool US economic growth.
However, Cliff Tan , head of global market research at MUFG Bank in Tokyo said that China was unlikely to do so as it could result in extreme market volatility and said: “Dumping treasuries would be an ineffective weapon for China as that would send yields higher and hurt the positions of their own holdings in treasuries.” However, China could threaten to do so and hope that this would make the US cease its policy of increased tariffs. Trump could very well ignore the threat.
Tan suggested that China could simply allow its currency to depreciate against the US dollar in order to offset the impact of increased tariffs and keep Chinese products competitive in the US market. However, this would make US goods relatively more costly in China further exacerbating the trade deficit. The US has often complained about the depreciation of the yuan, the Chinese currency. If China let is depreciate more against the dollar this will anger Trump.
China may soon overtake the US as the world’s largest consumer market. It can simply introduce more tariffs against US products. China’s Vice Premier Lu claimed he was confident that China could maintain sustainable and healthy development in spite of pressure from Washington. He stressed China was a huge internal market and also a big market for investment.
Liu said:“If we consider the state of China’s economy in the medium term, we can state that the Chinese economy faced a slight downturn last year. But now, a stage of growth has begun again. So, if we consider it in the long and mid-term, we are extremely optimistic.”
China retaliates after US action
On Monday, China’s Ministry of Finance announced that it is imposing export levies that target $60 billion of US goods effective on June 1. The tariff hike of up to 25 percent will target more than 5,000 items imported from the US to China.
The measures are in response to the US increasing tariffs on $200 billion of Chinese goods from 10 to 25 percent. However, the US has increased tariffs on even more Chinese goods since.
Global stock markets decline after announcements
The Chinese response has caused global stock markets to decline on Monday. The US S&P fell 1.46 percent. Dow futures dropped 1.36 percent and Nasdaq futures 1.99 percent.
China also is reported to have singled out US plane maker Boeing in respect to the trade dispute. Hu Xijin editor of state-run media outlet Global Times tweeted: “China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”
A later report shows all three major US indices fell: “The Dow Jones Industrial Average fell 617.38 points, or 2.38%, to 25,324.99, the S&P 500 lost 69.53 points, or 2.41%, to 2,811.87 and the Nasdaq Composite dropped 269.92 points, or 3.41%, to 7,647.02.”
Michael O’Rourke of Jones Trading said: “The market’s realizing that this was an absolute breakdown of (trade) talks and everything is gone backwards. It could be very bad. There’s a lot of uncertainty. This should lead to further slowing in the economy.” While Trump has so far pleased many corporations his newest move may lose him support among the corporate elite, but also among consumers who will face higher prices and farmers and others who will lose markets as a result of the trade war.
