Who will win this trade war? Print
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Sunday, 09 June 2019 09:15

Who will win this trade war?

Will Trump give way, roll over and save the talks by winding back on the latest tariff hike, or will the Chinese compromise and agree to curb their expanding technology sector?

Trump has an ego that won't let go and the Chinese cannot lose face, hence the impasse. This is as high a stakes game as ever there was. The latest salvo from China describing the US position as "naked economic terrorism" sets the scene for further escalation.

Both sides are making sacrifices top defend their positions.

World trade is the biggest victim with imports and exports from both countries taking a hit. Domestically, the US farm belt is being decimated. Chinese soya imports have been switched from US farmers to the Ukraine of all places. No worries, US farm subsidies will be all but doubled this year from $12 to $20 billion - that'll help Trump's re-election next year.

Chinese leverage comes in the form of the massive holding of US treasuries. Is china likely to dump these in an attempt to crash the US$? Unlikely as China needs to maintain sound currency reserves and US treasuries provide just that whilst the Yuan/CNH is a long way from being recognised as a world reserve currency.

The world is still addicted to dollars and will continue to be whilst the majority of world trade is dollar based. There is also talk of China withholding exports of rare earths that US tech needs but the big one, currency manipulation, could be the easy one that just might happen without much encouragement.


Take a look at the chart. the US dollar has twice pushed up to the magic number of 7. It's pushing up again. It could become a triple top or it could break through into unknown territory.

Never ending currency wars

Over the last decade or two, numerous US hedge funds ran large short positions on China. They were convinced that China's economy would collapse from non performing loans across the business and real estate sector resulting in a major liquidity and currency crisis. It now seems that the strong US dollar could be the catalyst for just this outcome.

As US interest rates and thus the dollar rose last year, it created a global shortage of dollars. The emerging markets and China is in constant need of dollars to maintain it's world trade and service dollar debts. International dollar liquidity is becoming tighter leading to strains on China's banking system.

Should the USDCNH exchange rate break through that magic number, as a consequence, Chinese exports will become ever cheaper on world markets and imports more expensive, reversing some of the effects of those US sanctions. This is the major upset that world trade and stock markets could well do without.