American Consequences - July 2018

WHAT COULD POSSIBLY GO WRONG?

Financial follies and disaster in the making

So what could China do next? The options range from the relatively benign to the potentially severe. China could block licenses for U.S. companies in the country, delay approval of mergers and acquisitions deals involving U.S. firms, or increase inspections of U.S. imports at borders. But if push comes to shove, China has more powerful options at its disposal... Namely, it could devalue its currency, the yuan, against the U.S. dollar. Weakening the yuan would make Chinese imports even cheaper, essentially negating the effects of the president’s tariffs. But this move could have significant consequences for China as well. If the yuan were to fall too far or too quickly, it could cause capital to flee the country. This is exactly what happened in the summer of 2015... And it ultimately helped trigger a sharp correction in both U.S. and Chinese stocks months later.

The trade war with China heats up...

Early this month, the White House imposed new 25% tariffs on up to $50 billion of Chinese imports. And President Donald Trump promised to respond to any retaliation with further tariffs on hundreds of billions of dollars’ worth of additional Chinese imports. While the initial round of tariffs focused on goods like steel and aluminum, the new tariffs were more targeted, affecting consumer goods like tuna, furniture, clothing, and electronic components. Although the administration wanted to limit the tariff’s impact on consumers, the variety of imports subject to tariffs has made that difficult, and China has once again promised to retaliate. But it’s unlikely that they’ll respond with further tariffs on U.S. imports... China doesn’t import enough from the U.S. to maintain a dollar-for-dollar fight.

14 July 2018

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