So the U.S.
China trade dispute
is essentially about
fairness. The U.S.
has long complained that
they're not treated
fairly by the Chinese that
it costs too much to
send American products
into China.
And along with that the
US does not charge enough
for Chinese products that
come into the US.
Now this has been a
topic of conversation for a
long time it's gone
through multiple presidents,
through administrations, through
many Congresses.
The thing is, nobody's ever
really done very much
about it.
There have been a
few measures here and
there, some tariffs
on Chinese
products when they've tried
to dump certain
products into the U.S.
but nothing as strenuous
and nothing as concrete
and nothing as serious
as what the Trump
administration has done
with the tariffs
that it's leveled
against Chinese goods.
Now of course the
Chinese have countered with
their own tariffs but
their retaliatory measures
are somewhat limited
in scope.
So the Chinese basically have
three ways that they
can retaliate against
American tariffs.
One of course is that
they can level their own
tariffs and they
have done that.
Number two is that they
can make it more
difficult for U.S.
companies to operate
in China.
Of course the big one that
comes to mind there is
Apple. It could really
make Apple's life
miserable through a whole
host of measures.
The third thing that they
can do, and this is
what we call the nuclear
option, is that they can
either stop buying U.S.
Treasuries or they can
actually start selling
U.S. Treasuries back
into the market.
Now the reason why this
is such an important
thing and why we call
it the nuclear option is
because China is the largest
holder in the world
of US debt.
It's got over a trillion
dollars, close to $1.1
trillion dollars in U.S.
bonds, notes, bills, those
those sort of things.
And the U.S.
counts on China to
buy up its debt.
Of course that's very
important with the U.S.
running nearly trillion dollar
deficits which are
expected to continue as far
as the eye can see.
So if China is not a
big player in that market it
could make life very
difficult for the U.S..
The idea of China going
to the nuclear option is
something that's been framed
in the local media
there, which of course
is its state-run media,
where they've talked about
scholars studying this
issue.
Now that's a very
calculated type of language
where they say, 'OK we're
just going to study
this. We're going to
look at this.'
It's basically saber rattling,
is what it really
comes down to.
They want the US to
know that this is something
that's on the table.
Everybody knows that the
chances of China doing
this aren't really good.
But as the dispute goes
on and if the dispute
continues to go on, which
it's likely to do, it
becomes more and more
of a possibility where
China has to say look
we can't match you dollar
for dollar tariff
wise. That's
the big thing for
them, because the U.S.
obviously imports far more
goods from China than
the other way around.
So if this continues to go
on, if the stakes get
higher, if feelings continue
to get hurt, it
becomes more and more of
a viable possibility for
China to step in
and stop buying U.S.
Treasuries or sell
them outright.
The big thing for China is
that if it does take
this type of nuclear option
it will not go
unscathed, if it
does something like
that. Because, look, China
needs to hold U.S.
Treasuries.
They're still the most
liquid instrument in the
world as far as
fixed income goes.
They have they carry a
pretty decent yield on
them. It also would
weaken the U.S.
dollar, which would
make U.S.
multinationals stronger.
And it would just generally
cause a crisis of
confidence within the world
that China is
stepping away from
this market.
So there is damage that
could be done significant
damage to the Chinese economy
if it would step
away from the market.
Now of course that doesn't
mean they won't do it.
China is under a
different political system than
the U.S.
President Trump and Congress,
they have to answer
to the American people.
The way the Chinese
government, the way their
political system is set up,
President Xi does not
have to answer on the
same level that President
Trump does. So they can
go ahead and they can
sustain a little bit of
damage. Of course, China's
economy is still a
very strongly
growing economy.
So they have a little
bit of wiggle room here,
but not a whole lot.
