Thoughts
1 am: A disastrous trade war is unlikely because China doesn’t have a lot of options.
The stock market has fallen a little bit recently. In the grand scheme of things, the U.S. stock market has been swinging sideways in 2018 in a very wide range.
Trump’s tariff threats certainly are a negative right now for the stock market, but before we jump to the worst case scenario, it’s important to remember that a disastrous trade war is unlikely because China’s options are limited.
You probably already know that China cannot retaliate dollar-for-dollar against U.S. tariffs because the U.S. imports a lot more from China than China imports from the U.S. China’s other options are also self-defeating.
The media states that China could offset the tariffs by devaluing their currency. While this could happen to a limited extent, China does not want to massively devalue its own currency. China is trying to attract foreign capital and boost its Yuan (they want the PetroYuan to replace the PetroDollar). Massively devaluing the Yuan defeats their own financial goals. China is not dumb enough to shoot itself in the foot.
Alternatively, China could sell its Treasury debt. The problem is:
