Trump’s goal (at least one of them) is to get China to crack down on North Korea. But China knows that Trump won’t stop with North Korea. Trump will want more.
Meanwhile, China does not want North Korea destabilized more.
"Trump has ordered a review of Chinese trade practices that force foreign firms to partner with Chinese firms. This comes shortly after he praised Beijing for its support of harsher UN sanctions on North Korea.
While US President Donald Trump presses China to step up pressure against North Korea, he is considering sparking a trade war with the world’s second largest economy.
On Monday, Trump plans to sign an executive order asking his trade office to investigate China for its alleged theft of American technology and intellectual property.
The president, who is vacationing at his golf club in the state of New Jersey, said Friday that he planned to return to Washington on Monday “for a very important meeting” and “we’re going to have a pretty big press conference.”
Trade Crackdown Coming Monday
"Trump on Monday will call for an investigation into China over allegations that the nation violated U.S. intellectual property rights and forced technology transfers, the official said.
Two Commerce Department reports examining whether to restrict steel and aluminum imports on national security grounds were expected by the end of June but have been bottled up in an internal review. Trading partners raised threats of retaliation and domestic steel users complained of being hurt by price increases and restricted supply.
Section 301 allows the U.S. to take unilateral action against countries that impose barriers to U.S. exports. That could take the form of increased import duties, but that would likely violate WTO rules. So the administration could look for some other form of retaliation, like restricting Chinese investment in the United States."
Major Economic Shock Possible
"One of the few achievements Trump can point to in his first six months in office is that shares on Wall Street have been steadily rising since his election victory last October. The “fire and fury” remark and the inevitable counter blast from Kim Jong-un gave the markets pause for thought. But not much more than that.
This is part of a recent pattern. Markets have become relaxed about geopolitical risk and with good reason. Wall Street started rising from the moment Iraq was invaded in 2003. There was barely any response to Russia’s annexation of the Crimea in 2014.
Over the past decade, markets have shrugged off geo-political risk but have proved much more vulnerable to economic and financial risk. And there’s plenty to worry about in that respect.
“They face the junkie’s dilemma, a choice between going ‘cold turkey’ now, or continuing to shoot up on credit and experience a bigger bust later.”
The lesson of 2007 is that all bubbles burst eventually. Alan Greenspan solved the problem of the bursting of the dotcom bubble by creating an even bigger bubble in the US housing market, and the Chinese authorities have done something similar.
When China’s Ponzi scheme comes crashing down – as it inevitably will – contagion to the rest of the global financial system will be limited by the fact that the banks are largely state owned and capital controls are still in place. Beijing will do what the west did in 2008 and bail out banks in danger of collapse. Even so, the economic shock to the rest of the world will be immense. Since 2008, China’s credit-driven expansion has accounted for more than half global growth.
If it becomes clear that China cannot rein Kim in, the US has an array of economic weapons at its disposal. It has made clear that it will slap tariffs on cheap Chinese steel and aluminum, and will punish intellectual property piracy. The US could also brand China a currency manipulator, something Trump ruled out during in his love-in with Xi when they met in Florida in April. Such a move would pave the way for further sanctions and inevitable retaliation from China.
Until recently, it has been hard to see where the next financial crisis comes from. Now it is blindingly clear. Trump is talked down from attacking North Korea but decides that somebody has to pay for his climbdown. China, seen to have shown insufficient support, is the obvious candidate. Economic sanctions are imposed, a trade war erupts and China’s credit bubble bursts. The financial markets have yet to wake up to this possibility. It is probably about time they did."
The Guardian first says “contagion to the rest of the global financial system will be limited by the fact that the banks are largely state owned and capital controls are still in place.”
Ha! You cannot disrupt half of global growth and expect contagion to be limited under any circumstances.
The Guardian gets it correct just a few paragraphs later.
Regardless of when the bust starts or why, Keen’s “Junkie’s Dilemma” is in play.
Meanwhile, Trump has repeatedly backed down from threats against China, Germany, the EU, Mexico, and Canada.
Is this trade war threat the real deal?
Explaining Balance of Trade
The seeds of trade imbalances were sewn in 1971 when Nixon closed the gold window. The trade deficit rose, then skyrocketed.
Smoot-Hawley did not cause the Great Depression, but it certainly made matters much worse. In general, that’s precisely what tariffs do in every case.
No one wins trade wars. Both sides always lose something. In the case of unwinding NAFTA, Mexico would get hit harder, but US farmers would also pay a price.
Net it all out, and US farm losses will be much greater than manufacturing gains (if indeed any).
Mike “Mish” Shedlock