The threat is real enough. I’ll spare you the endless rehashes of the massive coverage of Trump’s threat to block Chinese trade and investment. Trump states that he can so order under the International Emergency Economic Power Act (IEEPA). This is the right of a President to order the cessation of trade under a national security emergency.
This power has been used before, notably by Nixon and George W Bush under very different circumstances. If this course is taken, the global stock, credit, cash, commodities and futures markets will fall like houses of cards. There will be no place to hide from the inevitable global economic Chernobyl this move will cause.
The effect in the United States
The US will be hit extremely hard on all levels by any version of blocking trade. The first lucky recipients of this economic meltdown will be US companies, of course. The US economy does business with everyone, all over the world, at fantastic volumes. The sheer scale of the disruption caused by blocking Chinese trade will be like a super volcano.
No part of the US economy is immune. Since the 1980s, US trade has been largely sourcing its materials and goods offshore in endlessly increasing volumes. The “maquiladora motif” of offshoring applies to all sectors in some form.
American consumers will not get off lightly, whatever the scenario, in terms of costs and prices. On Main Street, Chinese goods are universal. There’s no part of the US economy which doesn’t buy vast quantities. Deprived of this source, other sources, like Japan, South Korea, etc. are unlikely to fill the gap in terms of scale. Prices would also be notably higher for such goods due to reduced volumes. Wages vs suddenly higher prices can only be a losing position.
The property market could collapse entirely. A lot of US capital is tied up in property, but if there are no buyers…? With their money and asset values evaporating, property investors would be in a truly hideous bind. Chinese-owned properties would also be un-buyable, in theory, if perhaps not in practice.
American companies which manufacture in China will be left holding the baby. How they’re expected to produce and sell goods under this option apparently isn’t on the radar at all. Apple, Microsoft, etc. will be in a very serious, and very expensive, situation trying to reposition.
It would take vast amounts of money for the US to retool to produce locally. This would be a gigantic financial hit on the corporations, well outside their ability to respond quickly.
On US markets, Chinese money generates a lot of trade. The Chinese typically invest big and fast around the world, particularly in the US. China holds a lot of US government bonds, for example. Bonds are government debts. China has about 28% of foreign holdings of US bonds, not a huge amount compared to the $22 trillion total bond debt, but enough to shake up the US bonds market pretty roughly.
The US stock market, which is so often scared of its own shadows, usually with good reason, is unlikely to react well to a China/US trade meltdown. In 2008, the markets literally imploded, due to a comparatively small, if truly hideous, debt-based crash. A China/US trade blockage would be infinitely worse, and the damage to the markets would be catastrophic. Related markets, like the futures market, would also fall to bits. Investor capital would be annihilated like never before, including the Great Depression.
The banking sector in the US is famous for its freefalls, even without a massive global trade hit. This situation could cause multi-tier credit issues, causing a lot of bank crashes. In this case, the decrepit domino analogy would be right.
For the US, blocking China trade is effectively cyanide. It’s a suicidal option which can only trash the US economy, leaving many years of work to rebuild.
The effect in China
The US is China’s top trading partner by a long way in terms of exports. In other markets, the relationship is far more complex, and China is well and truly tangled in it.
China is highly exposed to the US directly, but it’s indirect exposure which is the big risk.
Direct exposure is the actual US/China trade as outlined above. The US soaks up a lot of Chinese trade and generates a lot of money for China.
Indirect exposure includes:
• The collateral damage likely to be done by the huge impact of US economic reactions and the US dollar, which is the default global currency.
• The effect of the trade embargo on other US trade partners, if there are any after the embargo starts. Disruption to global markets will hit these smaller markets in many ways, none of them positive.
• Capital market meltdowns affecting Chinese/client trade by massive losses as capital markets crash.
• Physical trade movements and shipping which may leave many transport distribution markets in serious financial shortfalls.
• Chinese banks are not immune to massive asset crashes around the world, caused by the embargo. Quite the opposite; they could lose billions in seconds. Their presence in the global banking sector is truly gigantic, and they’re the ones carrying a lot of other people’s debt which may become irrecoverable.
• China’s shadow banking could expect to be first on the extermination list. These debts are well-known but barely tolerated by Beijing except for “expediency” purposes. That would hit a lot of Chinese consumers hard, unknown and unseen in the global chaos.
The Seventh Extinction
If 2008 was bad for the whole world, this can only be far worse. There are no gleams of light from this black hole of financial crashes. Even the super-rich will have nowhere to hide. Gold and safe havens can only do so much, even at sky-high prices.
The messy but hyperactive global economy is practically designed to collapse under severe stresses. The credit market, for example, has absolutely no options in a real major economic meltdown. You can write off and write off until the Great Pyramid learns ballet until you’re left with a gigantic hole.
Few if any global credit providers could have the bottomless pockets required to manage real transactions and defaults on this scale. Debts could be called in, but could they be paid? It seems extremely unlikely.
Even the black money markets could be severely damaged. These “unofficial” sources of money have X amount of hard cash. Imagine organized crime going broke, because it can happen if money suddenly becomes worthless, or prices destroy whatever value assets have.
Ridiculously priced health costs can only go up. Nobody will be able to afford it, to an even worse extent than now. Pharmaceutical companies, which are very capital-intensive, may find their finances become a lot more expensive, or dry up entirely. They’d still be liable for a debt, but that just makes it worse, as anyone assuming those debts would charge much more in an unstable market environment.
The dinosaurs had an asteroid to cause their extinction. The Seventh Extinction will be equally sudden, equally disastrous, and affect human life the way that asteroid did. Whatever crawls out of the rubble may find that being human isn’t the best financial option.
