October 21, 2021

The Queens County Citizen

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This is a crazy time for Trump to choose (another) fight with China

US plans underway to punish China for Covid-19 pandemic

But Trump can strengthen financial difficulties by trying to use tariffs or other sanctions to punish China for its role in the health crisis. Economists warn that such a strategy can backfire, potentially turning what is now a deep recession into a major depression.

“This is really foolishness. This is exactly what the US economy does not need,” Joe Brusuelas, chief economist at RSM, told CNN Business.

Wall Street is not happy with Tariff Man’s return, as Trump calls himself. The Dow fell 600 points, or 2.4%, late Friday amid concerns about renewed US-China tensions.

‘Really bad idea’

Remember that The Great Depression worsened by a global trade war. In 1930, Congress passed the Smoot-Hawley Act, which imposes tariffs on all countries that ship goods to America. Other countries reply with their own tariffs for US-made products.

Repeating this mistake could deepen the ongoing decline, because new trade tensions could cause last year’s US-China trade agreement to explode. Higher tariffs – or just the threat – can increase the uncertainty facing companies around the world. And that will add pressure to the complex global supply chain.

“The Smoot-Hawley sequel is a completely bad idea,” Brusuelas said.

Keep in mind that US tariffs for China do not directly punish China – US businesses and households pay the tax costs, not Beijing.

The timing of new trade tensions is very unusual.

In the past, the argument for fighting to China was that the United States economy was strong enough to withstand a trade war. But talk of tariffs is present even when Trump’s own economic adviser warns 20% of unemployment and 40% of GDP decline. In other words, the US economy is very vulnerable.

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Wall Street has been betting on a quick recovery from recession. That optimism has lifted the S&P 500 around 30% above its lowest level on March 23, at least before Friday’s fall.

The new tariffs will clearly doubt that assumption, according to Deepak Puri, CIO Americas at Deutsche Bank Wealth Management. “Discussions about new tariffs will be bad news, both for financial markets and the economy,” Puri wrote in an email.

Can Trump cancel the US debt owed to China?

Trump administration sources told CNN this week that there was a desire to use various tools against China, most worrying was the idea of ​​retaliating against China by canceling the US debt owed to Beijing, as was first reported in The Washington Post.
China has $ 1.1 trillion of US Treasuries, according to the Ministry of Finance, makes this an interesting idea for the Chinese eagle. And that could appeal to Trump, who calls himself the Debt King.
For example, Republican Senator Marsha Blackburn to Fox News Radio this week the United States should consider abolishing interest payments to China because of the economic costs of the pandemic. “I think it’s an idea worth exploring,” he said.

Market chaos

Such a move would greatly disrupt stability, because it would default to US debt, analysts said. That in turn could force rating companies to downgrade the United States’ own credit rating, undermining the widespread view that US finance is the safest asset in the world, where they serve as a benchmark for determining prices for everything from mortgages to junk bonds.

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“Collecting reparations” through ownership of the Chinese Treasury “will damage the financial markets” and “be questioned legally,” analysts at consulting firm Eurasia Group wrote in a note to clients Thursday. The company said such a move was “very unlikely.”

Chris Krueger, analyst at Washington Research Group, agrees. “We do not think this will happen and it is likely to experience serious back pressure, BUT we are in waters that are truly uncharted,” Krueger wrote in a note to clients.

Brusuelas, RSM economist, warned that canceling US debt held by China would “cause global financial markets to stop striding” and worsen the economic crisis.

“If something like that has ever been tried, it will create conditions for global depression,” Brusuelas said.

Trump prefers tariffs

Trump’s economic advisers have tried to shoot this idea.

“The full faith and credit of US debt obligations is sacred. Period. Full stop,” White House economic adviser Larry Kudlow told Reuters, adding that the Washington Post article was “completely wrong.”

Even Trump sounds wary about such a radical strategy. Asked whether he would consider the United States not paying its debt obligations to China, Trump expressed concern about undermining the US dollar.

“When you start playing the game, you really hurt the sanctity, the importance of the biggest currency on Earth,” Trump said on Thursday. “It was a rough match.”

But he did not back down from the idea of ​​punishing China through alternative methods that could also hurt the economy. “We can do it another way. We can do it at a rate,” Trump said.

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In other words, Tariff Man won over the King of Debt. Either way, the economy can be a big loser.