China’s payback

Posted By Darren Winters on May 31, 2019


China’s payback

Standby for China’s payback, in response to the US’s latest round of tariffs and sanctions on China. The US-China trade war truce has ended with no deal, and what comes next is the escalation of trade tensions between the two great trading nations.

China has rejected the US’s all or nothing deal put on the high-stakes table. So the US Trump administration early this month, May 5, decided to twist China’s Xi arm by raising tariffs from 10-25% on $200 billion worth of Chinese goods.

What follows is the non-cooperative game theory of tit for tat trade sanctions which I believe is about to be played out. Put simply payback is a bitch and this could get messy really fast.

Standby for China’s payback which could potentially cause underestimated collateral damage to the US and global economy

China's payback

US President Trump famously said, “trade wars are easy to win”. As mentioned in a recent piece entitled, Sell Signal, “It’s a trade war the Trump administration believes it can win, the battleground is target rich and the US is fighting on upper ground. US goods exports to China in 2018 were $120.3 billion, down 7.4%. Meanwhile, US imports from China totaled $539.5 billion in 2018 up 59.7% from 2008”.

But wars are unpredictable and what if China (a smart opponent) decides not to engage the US on high ground where the US has an advantage in its balance of trade.

The Empire’s weakest and most vulnerable point is its skyrocketing debt.

February’s Budget Deficit Was the largest in American History, amid a 20 percent drop in corporate tax.

China’s payback could be targeted to trigger inflation, which would force the Fed’s hand to raise the fed fund rates

There are many moving parts in this machinery China doesn’t have to throw a monkey wrench in the balance of trade wheel to grind the machinery to a halt.

China’s payback could come in the form of engaging in reciprocal economic warfare by deliberately triggering hyperinflation in the US economy.

China’s payback could be to target goods and commodities, particularly rare earth minerals, used in high-tech industries which could have the greatest inflationary impact on the US economy

Trump’s China hawks might not have factored in China’s payback

This could be to trigger US inflation and a Fed rate hike in response. Corporate and public debt levels are high and rate hikes in a slowing economy would hit hard. Moreover, in this highly finalized stock market, further rate hikes could send investors heading for the hills. Stocks already had a taste of that last December (worse month for stocks since the Great Depression) when the Fed hiked rates by a measly quarter point.

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