So the U.S. China trade dispute
is essentially about fairness. The U.S. has long complained that
they’re not treated fairly by the Chinese that
it costs too much to send American products
into China. And along with that the
US does not charge enough for Chinese products that
come into the US. Now this has been a
topic of conversation for a long time it’s gone
through multiple presidents, through administrations, through
many Congresses. The thing is, nobody’s ever
really done very much about it. There have been a
few measures here and there, some tariffs
on Chinese products when they’ve tried
to dump certain products into the U.S. but nothing as strenuous
and nothing as concrete and nothing as serious
as what the Trump administration has done
with the tariffs that it’s leveled
against Chinese goods. Now of course the
Chinese have countered with their own tariffs but
their retaliatory measures are somewhat limited
in scope. So the Chinese basically have
three ways that they can retaliate against
American tariffs. One of course is that
they can level their own tariffs and they
have done that. Number two is that they
can make it more difficult for U.S. companies to operate
in China. Of course the big one that
comes to mind there is Apple. It could really
make Apple’s life miserable through a whole
host of measures. The third thing that they
can do, and this is what we call the nuclear
option, is that they can either stop buying U.S. Treasuries or they can
actually start selling U.S. Treasuries back
into the market. Now the reason why this
is such an important thing and why we call
it the nuclear option is because China is the largest
holder in the world of US debt. It’s got over a trillion
dollars, close to $1.1 trillion dollars in U.S. bonds, notes, bills, those
those sort of things. And the U.S. counts on China to
buy up its debt. Of course that’s very
important with the U.S. running nearly trillion dollar
deficits which are expected to continue as far
as the eye can see. So if China is not a
big player in that market it could make life very
difficult for the U.S.. The idea of China going
to the nuclear option is something that’s been framed
in the local media there, which of course
is its state-run media, where they’ve talked about
scholars studying this issue. Now that’s a very
calculated type of language where they say, ‘OK we’re
just going to study this. We’re going to
look at this.’ It’s basically saber rattling,
is what it really comes down to. They want the US to
know that this is something that’s on the table. Everybody knows that the
chances of China doing this aren’t really good. But as the dispute goes
on and if the dispute continues to go on, which
it’s likely to do, it becomes more and more
of a possibility where China has to say look
we can’t match you dollar for dollar tariff
wise. That’s the big thing for
them, because the U.S. obviously imports far more
goods from China than the other way around. So if this continues to go
on, if the stakes get higher, if feelings continue
to get hurt, it becomes more and more of
a viable possibility for China to step in
and stop buying U.S. Treasuries or sell
them outright. The big thing for China is
that if it does take this type of nuclear option
it will not go unscathed, if it
does something like that. Because, look, China
needs to hold U.S. Treasuries. They’re still the most
liquid instrument in the world as far as
fixed income goes. They have they carry a
pretty decent yield on them. It also would
weaken the U.S. dollar, which would
make U.S. multinationals stronger. And it would just generally
cause a crisis of confidence within the world
that China is stepping away from
this market. So there is damage that
could be done significant damage to the Chinese economy
if it would step away from the market. Now of course that doesn’t
mean they won’t do it. China is under a
different political system than the U.S. President Trump and Congress,
they have to answer to the American people. The way the Chinese
government, the way their political system is set up,
President Xi does not have to answer on the
same level that President Trump does. So they can
go ahead and they can sustain a little bit of damage. Of course, China’s
economy is still a very strongly
growing economy. So they have a little
bit of wiggle room here, but not a whole lot.