Trump's China-Sanctions Madness Imperils The Dollar

Tyler Durden's picture

Authored by Ryan McMaken via The Mises Institute,

Last week US Treasury Secretary Steve Mnuchin warned the US will impose new sanctions on China if it doesn't conform to UN sanctions on North Korea:

"If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful."

In other words, the administration wants to sanction one of the US's biggest trading partners, and the world's second-largest economy.

China is the world's third-largest recipient of Americans exports, behind only Canada and Mexico. China is the world's largest source of imports for Americans, slightly ahead of both Mexico and Canada.

In 2016, Americans exported $169 billion in goods and services to China while importing $478 billion of goods and services. Every year, both consumers and producers benefit from the importation of Chinese electronics, machinery, food, footwear, and more.

Ratcheting up economic warfare with China could serve to cut off these avenues of trade and thus will only cost consumers and small business owners who currently benefit from lower-cost machinery, clothing, and more.

For the mercantilists in the Trump administration, of course, American consumers import "too much" from China anyway, and Americans and ought to be prohibited by the US government from purchasing what they want. The North Korea situation could serve as a convenient excuse for slapping prohibitions on American consumers in the name of "fair trade" while also serving as a foreign policy tool.

The last thing the US consumer needs is a trade war with China.

At this point, however, the US isn't talking about cutting off trade in such a blunt manner.

As Mnuchin notes, the strategy here is to "prevent [the Chinese] from accessing the U.S. and international dollar system." In practice, this would likely mean restricting access to the so-called SWIFT system which facilitates international transactions in dollars.

This idea is highly problematic in its own way. Were the Chinese to be cut off from the dollar, this would only create an enormous incentive for the Chinese to move away from the dollar into other currencies — including its own. China's largest trading partners would likely follow China in this exodus. Moreover, China and Russia have already foreseen the possibility of SWIFT being "weaponized."

As Jeff Thomas notes:

China, Russia and others have seen this day coming and have created their own SWIFT system, world cable network and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation.

Moreover, China is a key trading partner for Germany, Russia, Australia, Japan. Brazil, and South Korea. Will these countries simply write off China as a trading partner because thy can't settle accounts in dollars?  It's unlikely. 

While this would not necessarily destroy the dollar, a movement away from the US dollar would greatly diminish the dollar's standing as the world's reserve currency. It would diminish the dollar's role as the go-to currency, and this would, in turn, drive up borrowing costs — i.e. interest rates — for the US government. This would turn the US's currently sustainable debt problem into an unsustainable one. Massive domestic budget cuts in the US would follow. 

The fact is, as Foreign Policy noted last year, China is becoming "too big to sanction." Todd Williamson writes on how the IMF has now added China’s currency, the renminbi (RMB), to its basket of four reserve currencies known as Special Drawing Rights. In doing so, Williamson notes, the IMF "may have delivered a severe blow to the strength of a key tool in the West’s geopolitical arsenal: financial sanctions."

He continues: 

The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out — a total of $112 billion in 2015 — and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility.

In other words, slapping financial sanctions on the Chinese is nothing at all like doing the same to the Iranians or the Venezuelans. The Chinese economy and the Chinese currency are already huge global players which huge trading partners. 

Now, as Thomas notes, if the US forces China away from the dollar will not be without pain. If it were painless, the Chinese state would have abandoned the dollar already. 

China Is Highly Motivated to Go Its Own Way on North Korea

Should the US force the Chinese regime's hand, the regime will be highly motivated to stay the course on North Korea, in spite of the potential for economic disarray. 

China already feels itself surrounded by Western client states, including Japan, South Korea, Taiwan, and the Philippines. The Chinese state is not going to abandon its buffer state in North Korea. Were North Korea to be absorbed into a Greater Korea on American terms, this would be seen as a disaster by the Chinese, since it would place US forces right on a Chinese land border, just across the Yalu River. 

To get a sense of why the Chinese will not cave to US attempts at regime change in North Korea, imagine how the US would behave if China threatened the US with sanctions — unless the US permitted Chinese troops on the south bank of the Rio Grande. 

Add in the fact that the Chinese state is not subject to elections, and we can see the political will to carry on with de-dollarization in the face of US sanctions would be significant indeed. 

Another likely outcome of financial sanctions would be to encourage the Chinese to dump their holdings of US debt. China currently holds seven percent of all US bonds. Were the Chinese to dump these holdings, it will become far more difficult for the US and its central bank to continue paying rock-bottom interest rates on its 20-trillion-dollar debt. 

If the US wants to really continue with this sanctions game, it need also be prepared to face the reality that its not 1989, and that the world may not be willing to treat dollars and US sanctions in the way the US expects it to. The likely response will only be the latest evidence that the US "unipolar moment" is over.

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serotonindumptruck's picture

Economic sanctions are an act of war.

Xena fobe's picture

That"s fine.  It's inevitable.  Just a matter of when and how.

Buckaroo Banzai's picture

Any way you slice it, the dollar is fucked. Any one of a dozen things could set off the avalanche. If it isn't trade war with China, it'll be something else.

Rjh's picture

"the dollar is fucked." Gee, where have I heard that before. Oh yeah, on this site X400 every single day since its fucking inception. Give it up already. 

On another note, "libtard" can be used interchangeably between liberal and libertarian. Come to think of it, so can "faggy libtard"

Implied Violins's picture

The destruction of the dollar was the plan ever since 1913. Inflation has made it worth about 1% of what it was then, so that job has already been accomplished.

Beyond that, Nixon taking us off the gold standard then going to China was an acceleration of US decline. You can actually see as American industries were transferred there, so too did the Chinese economy rise and the US tank. This was PLANNED.

The next step is to transfer the reserve currency from US control to an interim BRICS control (which is why the Chinks have bought so much gold), with an eventual one world currency, as the Rothschild rag the Economist outlined in 1988.

Why is this not obvious to so many here? The USA and the dollar were set up for vilification in every way possible by the (((elite))) so that the transfer of control will be met with APPLAUSE. They WANT us to be happy that the evil west is dead - but THEY ARE THE ONES WHO DID THIS SHIT.

The international bankers are the ones to watch. They set us up to be dispatched. They should be the ones to reap the karma, along with US and western leaders who did their dirty work.

Pernicious Gold Phallusy's picture

We didn't have enough gold to honor the promises Nixon's predecessors made to redeem dollars for gold whenever foreign governments demanded. What was Nixon supposed to do?

Dame Ednas Possum's picture

Admit the crimes already committed? 

Or commit more crimes? 

 

Psychopaths usually double down. 

 

 

Pernicious Gold Phallusy's picture

Among kids faggy doesn't even mean faggy any more.

HRClinton's picture

Sanctions could very well be just a convenient cover/excuse for the inevitable: De-Dollarization, to the point of King Dollar getting dethroned.

myne's picture

The author also missed the fact that with fewer places to spend dollars, a lot will naturally flow to the one place that will always accept them. First, US industry will pick up and so will employment and tax receipts. Then inflation will pick up. 10+ year bonds will be crushed.

But the up side is, if they can fit the budget into the tax receipts, and hold official inflation under 10%pay the debt might finally inflate away. 20t n becomes very manageable at 1% as nominal gdp flies. Think Volker era.

 It's possible this is a strategy. 

Pernicious Gold Phallusy's picture

They don't need to do this to get more fiat dollars into circulation. The vast majority of dollars ex machina have always been on deposit at reserve banks, never in circulation. These could enter circulation and cause great inflation. The Fed could cause this by changing how they treat reserve banks with huge helicopter dollar deposits.

Slippery Slope's picture

A trade war with China would be disastrous.

Slowly fixing our economy through improving the business climate will make America great again.

A trade war will be a sudden economic shock that the world economy doesn’t need.

The Jaguar's picture

Same argument that led us into the mess in the first place. We don't need the cheap Chinese crap period.$500 billion a year and you think it's logical to keep going, did you vote for Hillary?

Taint Boil's picture

We don't need the cheap Chinese crap period.

Which one do you think is True:

1) They make cheap crap and we buy cheap crap

2) We order cheap crap and they make what the fuck we ordered.

iPhones are made in China.

 

BobEore's picture

The last thing the US consumer needs is a trade war with China...

which is why the next thing the US consumer is goona get... is a trade war with China. Disastrous? Mais qui! But doncha see??? It was always meant to be...

this way. Exceptionalist masters of the universe who indulged in a year of chest thumping about err...

cleaning the swamp... MAGA...merika first... end the fed... etc; etc/... failed to take any heed of numerous warnings as to what lay on the other side of the {Hill)... a trojan horse of enormous proportion... dressed up in suitable 'made in merika billionaire bootstrap' success story, something only a truly witless collection of hopeless dreaming smoking moar hopium than even an Obamanation of witless leftleaning bagholders inhaled a decade back.

And so... opening the gates of disneyland to a raft of rapacious kabbalist talmudist invaders of the bespoke-tailored kind... whose sharpened swords now shear the zheeple of any remaining illusions/dignities/wealth/hope...

and the goldmanites will drag the once mighty republic into the mud... all of a purpose... and

just as predicted. http://www.zerohedge.com/news/2016-07-28/power-nyet-how-one-word-stagger...

over a year ago. But hey - it's not so bad! At least you've still got yur vote buttons to play with!

MA-GG-OT dudes/Mnuchkins 'got your back!'

SmittyinLA's picture

Like the $500B a year China trade surplus doesn't imperil the dollar?

Riiiiiight!

NoWayJose's picture

Yup - but what would a $500 billion hole in the Chink economy do?

Matteo S.'s picture

300 bullion, not 500.

Well, it will be painful. The year it happens, it will be reduce China's economic growth to only 5% instead of 8%

And by the way : it will bankrupt most of the big US corporations that have offshored most of their manufacturing operations to China.

What a smart move indeed !

GoldHermit's picture

Just the threat of sanctions has imperiled the dollar with many foreign governments. I personally think a lot of people are sick of America and her attitude. I think they are getting ready to level the playing field and are going to say that an international basket of currencies should be used as the worlds reserves, not the dollar.

SHADEWELL's picture

Is that before or after they come crawling to accept US aid, then shit all over America

Fuck y'all...the lending window is now closed...good ruck good riddance to bad baggage, and die of starvation you ungrateful fucking douche bags

GoldHermit's picture

I am actually American and I am going to die of starvation because of all the fucking free shit we give all the grifters we let into this country

NoDebt's picture

I thought the whole point of this game was to devalue your currency faster than the other guy.  Did I miss something?  

GoldHermit's picture

No you did not miss anything, but the money printing contest is getting a little long in the tooth

NoDebt's picture

Over?  Did you say it's OVER??  Was it over when the Germans bombed Pearl Harbor??  Hell, no!  Nothing is over until we say it is!

 

TeamDepends's picture

Otter Kissinger: You fucked up, you trusted us!

Pernicious Gold Phallusy's picture

I thought Zuckerberg said that?

GoldHermit's picture

Lol - I said it was getting a little long in the tooth. There are plenty of examples of foreign countries looking to get around the American dollar. I believe there is a concerted effort to get away from it because it is not backed by anything and America is abusing its power. I love Animal House by the way

ToSoft4Truth's picture

Hold the presses.   China is buying $.

China preps sale of $2 billion dollar-priced bonds, first since 2004

Issue would be country’s biggest-ever U.S.-dollar bond sale

China is laying the groundwork for its first sale of U.S.-dollar sovereign bonds in more than a decade, a move toward expanding its ties with global investors as its economy improves.

The government is preparing to sell $2 billion in bonds this month, and investment banks are pitching for a role in the deal, according to bankers in Hong Kong.

Xena fobe's picture

Should never have been trading with them.  They will never stop until they destroy us.

NoDebt's picture

Nixon should never have gone to China.

 

silverer's picture

Certainly Bill Clinton should have stayed away. Look what happened after China got a whiff of Bill.

edotabin's picture

He was taken there. Not sure he had a choice.

Pernicious Gold Phallusy's picture

He did that thinking he would counterbalance the USSR after our CIA misled him on the USSR's abilities.

bugs_'s picture

A trade war is already upon you.

Peak Finance's picture

You know these other countries don't want Americans "pissing in their backyards" and we are terrible world policemen, BUT, when the time comes for these countries to deal with a pressing problem in their geo-political sphere, small-balled China does nothing.

I don't give a FUCK about Kim's undeclared war on the Pacific ocean and in my mind, it's 100% a China / Japanese problem and has nothing to do with us.  But yet they are unable to deal with it. 

So, Fuck China and their cheap worthless plastic crap. Cutting them off at the knees would be GREAT for the US.

Fucking Mises has a HUGE blind spot on these geo-political and trade issues. 

Albertarocks's picture

If China is anything, they're not "small balled".  You misinterpret their sane foreign policy of not bombing the shit out of every other country as some sort of weakness.  Bombing the shit out of every country who doesn't 'tow the line' is not a sign of "big ball", it's a sign of insanity. 

God forbid we ever get into a war with the Chinese or the Russians.  Let's just keep them as friends, something both of those countries would welcome with open arms.

BTW, I did not downvote you.  You're opinion is just as valid as mine.

Peak Finance's picture

OK well, their moves in Africa are kinda ballsy I guess and I see your point.

HOWEVER, I think it's pretty clear that this whole Norlk thing is really China's problem, NK depends on China, trades with China, and it's really China's responsibility to take the lead and get this done.

Not being able to handle NK Shows weakness / lack of leadership / indecisiveness on Chinas part. 

TuPhat's picture

I would have to add that the way we are trying to 'handle' NK is showing weakness on our part.  I think this article is actually a road map to show where we are going at the behest of the NWO.  As for chinese 'crap', I have purchased a wood turning lathe and a metal lathe that were both made in china.  They are sturdy and well made.  I have also purchased a metal machining mill that was made in china and it has been worth the price.  When I replaced my scroll saw that I bought at Sears 25 years ago the new one from Sears was made in China.  I try to buy american but it isn't usually possible.  Most american brands are marketing stuff made in China.  I would like to see a shift back to made in america but a trade war would only be bad for both sides.

SHADEWELL's picture

Right

As if China isn't planning on doing that anyway..

Fuck them Trump, do it now, before they are completely ready to roll out their little plan

Time to go Xi....XI............on those fucking yellow bastards

fangulos's picture

Kindly remind you mate, Chinese (Han ) as a race is much purer than japs, south asians and all those half-mongrel ZOG is promoting through fake media, for fuuck sake look around you, spotted dosens of mudsharks with their niglets? If we as a race swallow the 'progressive' pill, we are flushed down the toilet, period.

SurlysonofaBitch's picture

What the hell does any of that mean?

fangulos's picture

What a pittyful IQ, peasant. I was simply referring to his 'bastard' quote and telling him to look no further, US of Amerikwa is going to be a mongrelized 'bastard' nation within 50 yrs, so what's your bet?

Mewa's picture

Economic sanctions are the new US exceptionalism....wont be long and the US will sanction all her trade partners....then the bully in the schoolyard wont be playing any more...They will be a rogue state with no productive economy....then they can spend there time killing each other instead of bombing women and children around the world...The rest of the world can then shut the lights out and get on with living in peace...what ever happened to the peace movement? We need another Ghandi or John Lennon. Oh I forgot they were jailed too.

BarkingCat's picture

What you forgot is those 2 were not American. 

Jane Fonda was.

ReturnOfDaMac's picture

Too big to sanction?  Trade in RMB, problem solved.  You can buy oil in RMB, you can buy gold in RMB, you can buy real-estate in RMB, you can buy machines,factories,equipment in RMB, and you can even buy dollas in RMB.  Dollas?  Who the fuck needs dollas except US wage slaves?

Dancing Disraeli's picture

I've been given to understand that China's banking system isn't exactly rock-solid.

new game's picture

simple shit maynard:the first one backing their currency with something of tangible value wins. guess who is?

a)yen

b)dolla

c)euro

d)yuan

e)loonie

f)rubble

not a trick question.

russia may join in and back their currency with a simular gold/oil exchange.

and why not if they have the gold.

i see germany eventually going back to the mark backed by gold.

it will suck to own dollas when they are dumped as a result these powerplay moves by the idiots in trumps admin and trump himself, the prez of the box of rock econ club. breb.

maybe, dumber than a can of beans...

right now the yen/dolla/euro regime is it's final throws of race to the bottom with brics taking charge of future settlement of currency exchange. had to happen, eventually...

BarkingCat's picture

Only thing I see Germany ever backing their currency with is Quaran