As Trade War Escalates, Is China Running Out Of "Tit" For Trump's "Tat"?

In the space of a few hours last night, the US-China trade wars escalated from a modest $50 billion grenade to a $200 billion plus-plus bunker-buster with promises and threats of "strong retaliation" to the last retaliation (driven by the first retaliation) as China stepped up the rhetoric in response to Trump's direction to USTR.

However, in this 'tit' for 'tat' exchange, China may have a problem. As Bloomberg notes, with his latest move, Trump has threatened additional tariffs on a total amount of Chinese imports - $200 billion on top of a previously announced $50 billion - that China cannot match.

That’s because it doesn’t have sufficient American imports to apply higher tariffs to, so Chinese officials will need to look at other ways of retaliating.

 

However, as with all things, it's not quite as easy as that. This 'pure' definition of a trade war misses some crucial nuance.

As JPMorgan's Michael Cembalest notes, some US officials believe it’s easy to gain the upper hand in a trade war when you’re the  country doing all the importing. In a theoretical world, maybe, but not in the world we live in.

Over the last  decade, US companies made large investments in their Chinese  subsidiaries. In fact, the bilateral US trade  deficit with China almost disappears once you include sales of in-country subsidiaries.

In other words, US companies are doing almost the same amount of business in China as Chinese companies are doing in the US,  but through their subsidiaries rather than via exports.

The chart below shows examples of US corporate sales in China (not all  companies  disclose  sales  by  country)

The point is that the US has a lot to lose if China retaliates against US companies doing business in China.

These companies are some of the largest employers and capital spenders in the US, and their shares are widely held in US defined benefit and defined contribution plans.

And if we look by state, California and Tennessee face significantly more pain than Montana and Connecticut...

h/t @M_McDonough

So like bamboo Chinese handcuffs, bad trade deals seem easy to get out of until you start pulling on them.

In other words, the trade deficit is one small part of it, and China does have a few other devastating options in its retaliatory arsenal as we detailed here, most especially its two nuclear options - Dumping of FX reserves (i.e. US Treasuries), and/or Yuan Devaluation.

 

So in answering the question above - has China run out of 'tit' to respond to Trump's 'tat'? Yes, but what come next may be far worse.

Comments

gdpetti helltothenah Tue, 06/19/2018 - 11:04 Permalink

rather the SG love it... chaos generation... negative energy is 'food'.... and the current gameplan is 'out with the OWO, in with the NWO'.... so the outing, exposing of all the OWO lies, corruption, etc is par for this course.

China is doing it's usual 'Art of War' game... but Mother Nature is the real 800lb gorilla in the closet we fail to see, due to having had blinders put on us from birth... generation after generation... until we don't remember what reality is anymore... so a 'shock to the system' is needed... which nature does on a cyclical basis.... which we currently only experience in our human relations as empires fight for control of the helm... obviously Trumpy doesn't understand our dollar based empire... financialization is all we really do anymore...

Hollywood wouldn't like it if they lose their Chinese markets... just look at who the 'bad guys' are these days... all superhero BS... other than blaming Russia of course...

This Chinese situation is the same on a corporate level as we have at home here in the States... we see it mostly in those 'war' industries... they have been spread out in the main population areas in each congressional district.. to control the vote... China has done it with our own western corporations....

Interesting is how Russia is exiting Tbills, Japan more slowly.... again interesting, but the BOJ could explain it as the need to support their own CB activity... and yes, our Fed could buy it all up using their usual third party operators on Wall Street or London, Caribbean etc.... but it only makes our House of Cards more and more likely to collapse sooner as every trader learns of how this game works... the music is slowly stopping... that is obvious.. all not recognizing this will learn the hard way.

In reply to by helltothenah

D503 gdpetti Tue, 06/19/2018 - 11:33 Permalink

Anyone with a brain realizes this is Trump slapping all these expat "American companies" that have offshored to Ireland (google), Germany/China (Apple, Nike, etc etc).

We don't live in a world of nations, we live in a world of corporations that are free to capitalize on "foreign" labor and not be held to the limits of growth with respect to their customer and innovation base. 

We pay for the education, the products, and the physical cost while they excise the reward with respect to those costs. 

Bullshit. Nail these CEOs to the fucking floor.

In reply to by gdpetti

PrayingMantis Yellow_Snow Tue, 06/19/2018 - 15:19 Permalink

 

    ... “ ...  so Chinese officials will need to look at other ways of retaliating. ... “ ...

 

    ... China would simply use a “middleman”  ... they would sell to another country not on the “sanctions” list ... China would lower the “middleman’s price to a manageable level ... and that “middleman” country will ship the products to the US ... making a little profit, thus, avoiding higher tarrifs ... US consumers would still enjoy lower-priced Chinese-Made American-branded products ...

     ... and everyone would be happy ... except Trump’s handlers ... “wtf just happened! “,  they would scream ...

 

In reply to by Yellow_Snow

caconhma helltothenah Tue, 06/19/2018 - 11:53 Permalink

Orange Orangutan and his Zio-Banking Maia masters started a war they have no chance to win. 

By electing Xi for-life, China transformed itself into a war waging unit. Though China would like to postpone a major confrontation with the USA, it is clear to them that they are at war with the USA already. The Orange Orangutan's conflict/confrontation with EU does not help America. It just multiplies the number of enemies.

The US$ as the world reserve currency is about to collapse at any time.

Orange Orangutan and his Zio-Banking Maia masters are terribly arrogant and overestimated their capabilities. How fuck can the USA wage a war with China when we have a civil unrest at home?

 

In reply to by helltothenah

Tony 12-Letters DownWithYogaPants Tue, 06/19/2018 - 11:51 Permalink

> a sweet asian woman is a totally different matter

I think you're foolin' yourself. These plastic surgery modified harpies will go from zero to gold-digger the minute their heels touch American soil. If you got it like that, fine, but your average American male is no match for these insidious bitches.

In reply to by DownWithYogaPants

Adolfsteinbergovitch p4424119 Tue, 06/19/2018 - 23:42 Permalink

So you finally fixed your typos but you still aren't professional enough to look into the details of your fake ad. I guess it all comes up to the level of intellect that is required to do the job which I do not wish to discuss, for I just had lunch. 

$24551 @85/h gives roughly 290 hours of porno work per month. Man if that's not milking people like cows then what is this? 

Are you one of these Jewish porn moguls? 

In reply to by p4424119

tion DownWithYogaPants Tue, 06/19/2018 - 12:07 Permalink

High IQ Butt Boy wants to win K prizes by playing retarded r games. Sounds logical. American women with traditional values are garbage and are derided for being frank about having a family being a priority; they are told to not bring it up for awhile but instead show what capable strong and independent women they are to the men that tell the womenz they don’t want to be needed (but yet will only then end up hating the stupid bitches for not needing them, because it was a lie); they are supposed to give years of their youth winning stupid prizes from feckless pump and dumping menchildren who would much rather focus on keeping their dicks wet than taking up the responsibilities of being a husband and father.

Many who do become husbands will choose to not exercise strong male leadership and love and protect their wives to gain respect, but will instead love Hating their wives (who were likely Never loved as a person, only as an idea, and as non-idea-conforming-actual-human-being must have their personhood Destroyed) and will attempt to compel submission through Fear and creating insecurity. Yet many Western men have the issue being too high IQ to find any true satisfaction in fear based submission, but are too REEtarded to know how to gain respect based submission.  Keep hating American women, but your Asian dick wetters didn’t breed for you either, feminist-in-denial feckless-pump-and-dumping Butt Boy. The Asian womenz are also people, not ideas. You may find yourself disappointed if you think otherwise.

If you don’t like winning stupid prizes it may be time to rethink the stupid games You play. Peanutz will want to take pot shots at me for this post because muh false assumptions, but hopefully you will realize that I just want to help Make Stupid Games Obsolete #JustSayNoToStupidPrizes

In reply to by DownWithYogaPants

Matteo S. TGF Texas Tue, 06/19/2018 - 11:52 Permalink

Sure. As everybody knows, the US alone is able to export food and agricultural products to China. Brazil, Argentina, Australia, Canada, European countries, Russia can’t grow wheat nor breed cattle !

 

No, in fact I was just kidding : you are just so ignorant.

 

Face the hard truth : China holds the US by the balls much more than the reverse.

 

The only fatal weapon the US still has for a few years or maybe only months is shutting down the Chinese internet access by twisting ICAN’s arm to do so. Which won’t last long since China, like Russia, is building at lightspeed the infrastructure that will nullify the US and ICAN’s ability to do so.

 

China can :

- kill the dollar (it’s already hugely overvalued),

- kill the US IT industry by stopping Chinese rare earths exports to the US, not to mention other measures against US IT firms whose production is widely based in China,

- declare the US patents and other US intellectual property null in Chinese jurisdiction,

- kill the US aerospace industry by cancelling all orders to Boeing,

- ... etc, the list is almost endless.

 

It is not very complicated. Just do the maths.

 

There are but 320 million people in the US who just maintain an artificially high purchasing/power through fake dollars and voodoo financing based on the aiming status of the dollar as the soon ex-world reserve currency and live at the expense of the world. That’s the true meaning of the massive US trade deficit : importing real goods and services in exchange for worthless paper.

 

And there are 1 350 million chinese that have become the workshop of the planet, register huge excedents, spare and invest much, and that everyone on the planet is courting.

 

Now read Sun Tsu. And realize that you will be much better off if you don’t fight an already lost battle.

In reply to by TGF Texas

known unknown TGF Texas Tue, 06/19/2018 - 14:12 Permalink

Hey Fool have you ever been to China? First it's 1.4 billion not 1.2 billion. Secondly if you stopped exporting food to China they could continue to feed themselves for the next 200 years whereas the American citizens would have all starved to death long ago. China demolished 1000's of acres of fertile farmland to build condos. And they still have a surplus of food.

In reply to by TGF Texas

barliman Four Star Tue, 06/19/2018 - 10:36 Permalink

 

China has a dirty little secret - almost no foreign company can get their "profits" out of China.

 

Accounts UnPayable - China's Dirty Bomb

 

Back to the need to know open secret mentioned above. The Chinese corporations are terrible at paying money owed to the corporations they do business with or of which they are a nominal subsidiary.

How bad?

Anecdotal evidence suggests an average greater than 180 days for partial payment on their Accounts UnPayable. The outside corporation has to be EXTREMELY "well connected" to average below 180 days. In China, being "well connected" means someone in the Chinese Politburo has a reason to push others to make you happy. We will leave it to the readers to sort out what's required to qualify for the EXTREMELY adjective.

If Chinese businesses just owed a few hundred million dollars, they have a problem. If Chinese businesses owe HUNDREDS of BILLIONS of dollars, then EVERYONE doing business with them has a problem.

A "dirty bomb" uses radioactive material and explosives to widely disperse the material and contaminate everything within it's blast radius. When it comes to China's Accounts UnPayable, the blast radius in terms of corporations owed money they are likely NEVER going to collect ... is global.

If you are naive enough to think, "This isn't possible! Companies would have to report these as 'bad debts' on their financials." just remember WHO makes them issue the financial statements in the first place ... and that they have "revised" financial reporting requirements in the wake of the 2008 Financial Crisis to pretty much equal the standards of Enron.

When will the Accounts UnPayable bomb go off?

Shortly after a major market downturn, when the drop in cash flow from paying customers can no longer hide the cash flow missing from China.

 

https://www.spartareport.com/2017/02/accounts-unpayable-chinas-dirty-bo…

In reply to by Four Star

Tony 12-Letters EuroPox Tue, 06/19/2018 - 10:30 Permalink

I'm thinkin' this trade war should only last another few hours and should be over this afternoon and stay off at least until tomorrow afternoon. There's probably a slight chance of trade war on Thursday morning for a few hours, but then off again until early next week. There may be an increase in turgidity by next Wednesday, but should blow over by Thursday night.

In reply to by EuroPox

acheron2016 EuroPox Tue, 06/19/2018 - 11:44 Permalink

So what?  Everyone is so committed to continuous growth they've forgotten the very meaning of "business cycle".

Let them dump our bonds.  They can only do it once.

We've hollowed out our middle class sending all our jobs to China.  But due to corruption, ignorance, and just plain old incompetence China didn't actually grow a meaningful middle class. Nor a broad based economy -- Chinese slave labor build baubles for American consumers at artificially low prices.

America is one of the only countries on earth can can LEGITIMATELY be FULLY self sufficient.  We don't need another country to grow our wheat, or wind our transformers.  We can produce airplanes and rockets; butter and steak.

As the OLD saying that you're not supposed to remember in the age of "globalization" goes: When America gets the sniffles, whole continents die.

This is a battle that the American people may well not have the fortitude to win - after all they voted an islamic terrorist that doesn't know how many states there are in the union President -- TWICE!  But if it were to go "to the mattress" the outcome is preordained.  Which if anyone were keeping score at home, that is WHY China has been stealing our IP and blackmailing our corporations for 40 years.  They already knew all this.

In reply to by EuroPox

LaugherNYC EuroPox Tue, 06/19/2018 - 14:33 Permalink

The 10 year moved about 4 bps on Russia's sale... rates have been rising for 18 months, in case you didn't notice. Rates are now back where they were before Russia's sale.

Trump needs to moderate his rhetoric a little faster than planned. He staked out his extreme stand, and now is pushing hard in order to have something to give in exchange for China to move further, and to stay strong on NOKO. 

But, he may overshoot the mark at this rate.

Trump does this in negotiating (I have first hand knowledge of this) -- when something works, he will push it further. If he believes the other side will cave, he won't moderate. The problem is, I have watched him tank great deals because he thought the other side would give him everything, and then they walk away. In this case, he has too much to lose. Hopefully Ross will tell him he needs to make a deal now before it goes totally sideways -- get the ego out of it, DJT.

In reply to by EuroPox