Another round of increased tariffs is set to take place. Many aren’t worrying about it since the US imports so much more in Chinese goods than the Chinese imports US goods. The thought is that the US can cause more pain than the Chinese can cause the US. Are those folks looking at the whole picture?
Sun Tzu wrote in The Art of War
"If your opponent is of choleric temper, irritate him."
Wow....Nelly! This big game of chicken is likely to have a lot of other effects that I don’t think have been considered.
The natural proclivity for anyone who is cornered is to “come out swinging”. There are more striking techniques other than a straight on punch (tariffs). There is the round house, the upper cut, foot kicks, knees, head butts and others.
Here are some things to consider. When the Chinese sell the US goods, they get US dollars. Much of this ends up being used to purchase securities in the US. A reduction in purchases could cause less demand for a very high equity market. Additionally, their purchases in the fixed income market could be significantly reduced. If the demand for government securities is reduced, yields would have to be increased and security values would have to be commensurately reduced to move debt. The US government is currently in a very high deficit position. This is likely to cause the crowding out effect in the debt markets and push up interest rates.
Another weapon that could be used by the Chinese could be expropriation of US assets. There has been significant investments in China over the last few decades. This is another whole can of worms!
The point is that a cornered opponent will likely use whatever weapons they have at their disposal. This trade war may be in slow motion but it is still moving. If you poke a bull with a pointed stick, don’t expect them to sit down and take it. Each action begets a reaction that, in turn, results in another action.
No one is going to be picking and smelling daisies. We’re not talking about Ferdinand the Bull here!
