One would not have a clue looking at global equities that there has been a sharp escalation in trade tensions in the past 36 hours. As was well tipped the US imposed a 10% tariff on $200 bln of Chinese goods and indicated that the tariff will rise to 25% at the start of next year. President Trump also threatened to quickly follow up with another tariff on $267 bln of Chinese goods it retaliated.

China had already threatened to retaliate and specified the goods and tariff rate for $60 of US goods. How many advisers or informed observers would have predicted China would back down? Therefore, it seems reasonable to assume that the Trump Administration wanted to go ahead with the full enchilada ($50 bln +$200 bln+$267 bln). It continues to signal that in this Administration, the Treasury Department does not set policy.

Consider that before World War I, Mexico, Argentina, and Brazil were integrated into the world trading system. The Great War disrupted trade relations, and this helped facilitate the import-substitution developmental strategy. The US appears to be demanding nothing shy of China changing its developmental strategy. China cannot abide. No major power would. Of course, this does not mean China cannot do a better job protecting intellectual property rights. 

It is interesting to look at some of the (~300) goods that were removed from US list (and none were added). There were many products for children, like high chairs, car seats, and playpens, a few Apple products (e.g., watch, and ear pod headphones), and rare earths. Many countries expressed disapproval China cut off its rare earth sales to Japan amidst a dispute. It appears to be a potential point of leverage. Yet the decline of $10 bln in Chinese holdings of US Treasuries is not linked to the trade tensions. Given its holdings and imprecision of the data, it is hardly a rounding error of its $1.17 trillion of US Treasuries. Moreover, its purchases of Agency bonds more than offset the decline in Treasury holdings.