What Is Causing The Trade War
The United States is one of Chinas biggest trade partners in Dollar terms. America imports hundreds of billion dollars more from China than it exports to its Chinese counterpart. This has been causing a massive divergence in America’s trade sheet and has led to a surge in its fiscal deficit numbers. Higher fiscal deficit numbers have triggered a widening gap in the US balance sheet raising concerns in the corridors of the White House.
Rising Debt & Dollar Outflow
Higher imports from China have triggered a massive outflow of dollars from the United States into the Chinese economy. This uneven equation is the cause behind the rise in the US debt numbers which currently stands at a whopping $21 trillion dollars. The Chinese government, however, has been a direct beneficiary of this trade imbalance. China has intelligently invested most of the dollar inflow to purchase US Treasury Bills. According to a recent report released by the US Treasury, China has been the single biggest foreign holder of US government debt. The Asian giant had added $8.5bn to its Treasury holdings in February, taking its total to $1.18tn, according to data released by the US Treasury.
It’s Not Just A Trade War
The Trade war between the US and China is a war to regain currency supremacy. The United States is currently the most powerful nation of the world by virtue of its Dollar. China, on the other hand, wants to change that equation and turn the tables against the most powerful nation of the world. The only way China could pull off such a feat without bloodshed is by stripping the US Dollar of its powers. Since the meltdown in 2008, the Federal Reserve has rolled out a series of QE measures leading to a fall in unemployment numbers and lower lending rates. Currently, the US unemployment rate stands at an impressive 3.9% which is way below the benchmark 5% considered as full employment by the Federal Reserve. A steady rise in inflation and low unemployment rates have forced the Federal Reserve to raise the Federal Funds rate which currently stands at 2%.
So How Does All These Impact Global Markets
Higher lending rates are weighing heavily on US exports. Consumer products manufactured in the United States are facing stiff competition against the European Union and China. This trade disbalance has forced President Trump to impose higher tariffs on imports from Europe and China. In retaliation, the Chinese government has imposed higher tariffs on US exports as well. On the whole, a trade war is detrimental to business growth, it is an artificial method of curbing demand by pushing up the tax component of consumer goods. Higher tariffs do not add life or value to the product, neither is it a solution to the trade imbalance between the US and China. Conventional economy states that global businesses are driven by the fluctuations in the demand-supply curve. In reality, a demand-supply equilibrium is a sure sign of stagnation. Ironically the US-China trade war is not about striking an equilibrium, rather it is about regaining business supremacy. Currently, the world has two equations to work on - The US which is an $18.57 trillion economy with a $21 trillion dollar debt and China holding the largest tranche of US Treasury and is an $11.2 trillion economy. Mathematics says, if the United States defaults, it has the power to trigger a meltdown which will dwarf the subprime crisis in 2008. However, if China goes down it has all the means to sell the US treasury rendering unprecedented dollar liquidity in the global markets.
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