The trade war with China is unhealthy for economies and other living things. After weeks of taking economic hits from Administration tariffs, and watching its own stock market fall, China responded in a way markets understand. It sold.
That’s the only way I can explain a day when both stock and bond prices fall. If American investors are selling stocks, they’re usually buying bonds, and vice versa. (They’re not buying bitcoin, that’s for sure.)
So, it should seem obvious that someone outside the U.S. was behind the selling, and who outside the U.S. has a reason to sell the U.S. market? China does. The Chinese Yuan was selling at 6.93 to the U.S. dollar on Oct. 8. On Oct. 11 it was up to 6.9. China is supporting the Yuan by cutting back foreign investment, and that means selling U.S. assets.
More War Talk
Supporters of the Administration continue to talk up the trade war as a conflict that can be won. Ed Yardeni, for instance, chortles that China is about to fall over a demographic cliff, ignoring the fact that the Administration’s anti-immigration policy means we’re falling down with them.
The rejection goes both ways. Foreign buying in China’s stock market has dried up, exacerbating the Chinese market’s fall. The global market is tied closely together, so that pulling on one market causes others to fall. Tariffs reduce global trade. For China to support the Yuan in the face of U.S. tariffs, it must sell dollars and dollar-denominated assets. As was true in 1930, with the Smoot Hawley tariff, taxing trade doesn’t improve the domestic economy in an interdependent world.
The global war of all against all is having real world impacts. U.S. students studying in Europe are only being given visas if they can prove they are financially independent and will return home. Foreign workers in the U.S. are having their visa extensions denied.
The U.S. Treasury reported in July that China held $1.17 trillion in U.S. treasury securities, about 18.7% of total foreign holdings. That’s down from a peak of $1.20 trillion in April 2017. The U.S. is now adding $1 trillion to its debt pile each year, more than double the level of 2015. Government debt, unlike trade deficits, must be paid back.
One of the big unknowns in all this is how much U.S. stock Chinese investors may hold. Chinese companies like Alibaba (NASDAQ:BABA) have been coming to the U.S. market throughout the decade, but Alibaba shares have fallen by one-third just since June, opening for trade Oct. 11 at $136.50.
The Administration is now saying it will police all foreign investment in U.S. markets more rigorously, especially Chinese investment. That is not going to help the market.
The Big Lie
The big lie in all of this is that China’s trade deficit is some sort of threat to U.S. sovereignty, that trade deficits must be made up with debt purchases. It’s not true. When Apple (NASDAQ:AAPL) has its phones assembled in China that reduces its cost of goods sold. It creates efficiency, which lets it sell more phones around the world. It doesn’t mean Apple is borrowing from China. Global trade means more jobs. Which means less global trade means fewer jobs.
The entire trade war is thus based on a faulty premise. But it is having real world consequences. Raising trade barriers, reducing trade, reduces wealth just as rising trade increases wealth.
As was said in Citizen Kane, however, we may need more than one lesson on that score. And we’re going to get more than one lesson. If we want growth, we must end this trade war now.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.