Trade End Game Scenarios: Boycott Treasuries vs Yuan Devaluation

Since there is no longer any reasonable debate about a trade war having started, let's investigate how it ends.

End Game Analysis

Treasury Boycott Thesis

I am surprised that Rosenberg brings this up because in my mind, this hash has been settled long ago.

What exactly would China, Japan, and Germany do with their reserves and ongoing trade surplus? Mathematically they have to do something.

Historically, that something has been to buy treasuries. But I suppose China could buy could be gold or US equities. The latter would be smack in the middle of an obvious bubble.

And if China were to dump US treasuries, the alleged nuclear option, it would serve to strengthen the Yuan. Recall that China sold US treasuries to support the Yuan and stop capital flight. In a trade war, China would not want an appreciating currency!

I think Rosenberg proposes nonsense, but given the nonsensical actions of Trump, I cannot rule out nonsensical or illogical responses.

This leads us to the most logical real threat.

Yuan Devaluation Thesis

China cannot retaliate with enough tariffs on its own to combat tariffs imposed by the US. However, the yuan does not float. China could devalue the yuan enough to counteract the value of US tariffs.

Of course, Trump could ban Chinese imports in response, but prices at Walmart, Costco, Target, everywhere, would skyrocket.

This scenario is nearly the opposite of what Rosenberg suggests. It is also far more credible.

But hold on. It is not without risk. Recall that China sold US treasuries to stop capital flight. If China devalues, there is a strong likelihood that capital flight would intensify.

Sester Chimes In

Excuse me Brad, but it's now $450 billion proposed.

Lance Roberts Chimes In

Back to Rosenberg

This Tweet makes far more sense.

Relax, Nothing Worse Will Happen

This whole thing could blow over. Trump and China may come to an agreement that brings us back from the brink.


  • Door 1: Treasury boycott with untested results likely to be hugely negative for everyone
  • Door 2: Devaluation with known immediate consequences that are certain to be bad for everybody. The long-term prognosis depends on further retaliations.
  • Door 3. Cooler heads back off the crisis a bit.
  • Door 4. Every country abolishes all tariff

Realistically, door 4 is closed. Curiously, it's the best option no matter what any other country does.

Winning by Losing

  1. Trump Ups the Ante: Trump Now Threatens Tariffs on All Goods from China: $450 Billion
  2. A Fed study shows "Tariffs Kill High-Paying American Manufacturing Jobs and Businesses".
  3. Auto job losses alone are likely to hit 45,000 as noted in Pandora's Box: Another Look at Steel Tariffs.
  4. On June 8, I noted Three US Tire-Chord Makers Threaten to Close Doors Due to Trump Tariffs.

Trump believes China will lose more. This we call "winning".

Mike "Mish" Shedlock

Comments (26)
No. 1-25

I didn't see Rosenberg's tweet (I'm not on twitter). He's a pretty thoughtful fellow, could you add it to the post?


Mish - you keep pushing unilateral free trade. You have never addressed the real world observation that China has done better over the last 20 years with mercantilist high tariffs and higher non-tariff barriers than the US has done with low tariffs and mostly non-existent non-tariff barriers. When theory does not match reality, theory has to be revised.


While I believe that Trump is deeply dissatisfied with the trade deficit with China (although he may not have fully thought through the former symbiotic trade relationship between the US and China, whereby China would sell the US cheaper goods (China benefit) while China would finance US deficits by investing the surplus in US treasuries and pollute its own homeland (US benefit). That mutual relationship worked great for both sides for many years.

But given the growing tensions with China over its emerging dominance in the Asian region, the build-up of its military and support for various US nemesis countries (i.e. Russia, North Korea), it could be that reducing the trade deficit may not be the ultimate goal. The US deep state may have more malevolent intent.

Destabilizing China’s economy and impeding its ability to challenge the US in the region would certainly remove a thorn in the side of the US and potentially enable to the US to re-emerge as a dominate player in Asia. As such, any growing military tension with China would certainly put China’s US Treasury holdings at risk as no one would be surprised or dismayed if the US were to default on US Treasury holdings held only by China. I certainly could see a scenario where China would stop adding to its US Treasury holdings, if not reduce them substantially, especially if China thought that this trade war was a cover for something much more sinister being conducted by the US deep state. But hey, the US would never do that, right?


BTFD. The Fed had no problem putting 4.5 Trillion on it’s balance sheet before. No reason it won’t double down if all this trade banter dislocates it’s “growth” agenda.


You make the assumption that "China has done better" because of their mercantilism. I presume Mish would argue that "China has done better" despite these policies. You have not demonstrated any correlation between hypothesis and conclusion.