Tariff Takedown: How Trump Cornered China at 125%

hi I'm Dong Shan welcome to Digging into China where we explore China in depths to reveal unique perspectives over the past few days the US China trade war has unfolded with remarkable intensity so much so that the pace at which I produce my program struggles to match the rapid developments we are witness round one round two and now round three each phase more gripping than the last xi Jinping and President Trump are engaged in unrelenting standoff neither willing to yield trump imposed a 34% tariff on China deeming it a matter of reciprocity and the Xi Jinping promptly responded with a 34% tariff in kind now as we reach the third round of this confrontation Trump has escalated further levying a 50% punitive tariff bringing the total US tariffs on China to an astonishing 104% without hesitation she countered with an additional 50% of tariff on his own then on Wednesday Trump made an unexpected announcement given that China alone is boldly resisting America's tariff measures he is increasing China's tariff to 125% meanwhile all other nations are granted a 90-day exemption subject only to a baseline 10% tariff bear in mind the 125% tariff Trump announced on Wednesday was in addition to a 20% added to China since President Trump returned to office the actual tariff is 145% upon this announcement US stock market surged dramatically reaching heights scarcely recognizable this maneuver by Trump delivered a decisive blow to Shiinping most strikingly it swiftly unified America's allies while straining their ties with China consequently these allies are now far less inclined to align with China against the United States trump has at last shifted away from a broader global tariff offensive revealing that his true focus has been China all alone i suspect this reflects the prevailing sentiment among many Americans targeting China alone is sufficient engaging in a trade war with the entire world would inflict excessive harm on the United States itself it appears Trump is not entirely reckless he remains attuned to the needs of the capital markets and receptive to council alternatively one might consider that he is employing this strategy to gauge the reactions of his allies draw into a trap provoke a response and isolate it further remarkably Xi Jinping had taken debate on Wednesday US Treasury Secretary by scent articulated it thus this was driven by the president's strategy he and I had a long talk on Sunday and this was his strategy all along and that you know you might even say that he goed China into a bad position they they responded they have shown themselves to the world to be the bad actors and and and we are willing to cooperate with our allies and with our trading partners who did not retaliate it it wasn't a hard message don't retaliate things will turn out well what's your message the trade wars trajectory is now unmistakable leaving Xi Jinping as the sole figure reeling from this impact why did he insist on challenging United States so directly offering no room for compromise he has preserved his dignity but sacrificed a substantive gains with the US tariffs on China now at 125% or 45% and other nations benefiting from Trump's exemptions they have little incentive to stand with China and risk incurring his displeasure she now faces a critical decision will he persist in his defiance of the United States raising tariffs to 125% as well or concede defeat at this junction i anticipate he will choose the former he's likely reasoning thus the sanctions have already reached this severity whether tariffs are 100% or 200% the distinction is negligible it amounts to a complete trade rupture why surrender now how would I justify that to the patriotic masses at home where do I place the prestige of the world's second largest power better to endure to the end after all I'm not the one who will bear the hardship i have observed a matter worth discussing one that reflects a profoundly unwise action on China's part last week US Treasury bond prices declined sharply particularly the yields on long-term bonds which rose abruptly this suggests a significant volume of long-term treasuries was sold off suddenly speculation arose as to the culprit japan holds the largest share of US treasuries abroad following followed by China could one of these nations have deliberately divested to retaliate against the US japan's finance minister swiftly clarified "We are not responsible we do not engage in such reckless sales." China's leadership however offered no comment yet various voices within China eagerly claimed the responsibility asserting "Indeed we did it." What of it trump seeks to suppress bond yields so we offload over $700 billion in treasury to drive them up and disrupt his plans a precise counter strike whether China truly orchestrate this remains uncertain nevertheless the rumors reached the Treasury Secretary by scent during a Tuesday interview with Fox News he has he was asked certain parties suggest the recent drop in treasury prices stems from China intentionally selling bonds to strike back at the US your view bent responded with derision if they have indeed done so it is an act of sheer folly akin to lifting a stone only to drop it on their own feet china has effectively invited this accusation upon itself in my assessment it is unlikely China was the primary actor the decline in treasury prices these past few days more likely stems from the strained market liquidity prompting institution to sell safe assets to meet margin requirements yet China's public discourse insisted on taking credit ensuring that even the US Treasury Secretary took note this has fostered the perception that China is initiating a financial offensive against the US in response Vent indicated that the US might expel all Chinese stocks from American markets as a reprisal for this perceived financial assault thus the situation continues to deteriorate in truth the notion that the China could deliberate the US by unloading treasuries is of limited merit china holds approximately $700 billion dollars in US treasuries equivalent to a single day trading volume in that market a sudden sell off would indeed depress prices temporarily but the market would soon absorb the access and the stability would return for China however liquidating $700 billion in such haste might yield only 500 billion in return as straightforward consequences of driving down the price oneself what benefit then that China derives from squandering such sums moreover selling treasuries merely converts them into dollars would China retain those dollars if so it remains tethered to dollar do uh denominated assets if not and exchanges them for yen the UN's value might rise briefly yet when investors observe that China's treasury holdings have vanished and its foreign reserves diminished with insufficient dollars to sustain and sell they will hasten to exit China alternatively they might speculate are they preparing to move on Taiwan retaining no treasury at all in either case capital would flee treasuries serve as a signal of confidence for foreign investors they cannot be carelessly discarded consider the past two years china has incrementally increased its gold reserves while gradually reducing its treasury holdings yet it has never executed a massive selloff last year it shared perhaps $50 billion in total china is well aware that attempting to undermine the US through Treasury sales is an imprudent strategy you likely noted the UN's movement last week it depreciated beyond 7.4 in a single day some might view this as significant but in fact it reflects China's efforts to moderate the decline reuters reported that the central bank instructed the state-owned banks to refrain from purchasing foreign currency for their own accounts and intensified oversight of client forex transactions all to temper the UN's fall i suspect the central bank offloaded a modest portion of treasuries in recent days to bolster the UN though the amount was surely limited with the US tariffs on China now at 125% the resultant trade losses are severe inevitably straining China's foreign exchange reserves i must caution those in China the annual $50,000 foreign exchange allowance may soon be revoked and China's dollar supply grows increasingly constrained should she persist in his resistance today imposing further tariffs or even hinting at a dumping treasuries Chinese stocks listed in the US could face immediate exposure those listings currently provided a vital source of dollars without the dump she's options narrow further consider the future china's foreign reserves will face mounting pressure and the UN's exchange rate has reached a point where depreciation is unavoidable yet the central bank expands dollars to slow this descent striving to prevent the capital flight a rapid plunge in the UN would trigger widespread along everyone scrambling for dollars both foreign and domestic funds departing on mass the consequences would be dire ultimately in this trade war with the US China possesses a few viable options if Trump can unite his allies to concentrate their efforts against China the repercussions for the US itself remain manageable indeed Trump's domestic support might even solidify in such circumstances he need not fear the communist party compelling the Chinese populace to endure extreme hardship to outlast him that being China's sole advantage without it China's uh prospect of prevailing diminished to new is there anyone within the Communist Party willing to console she to seek reconciliation with the US during the 2018 trade war she initially adopted a similarly resolute stance countering Trump at every turn until Liu Hur persuaded him to negotiate a truce where is Liha now he has long been unceremoniously sidelined by Shei the president is clear who among Shei's current circle would dare advise him to prioritize the people's welfare and pursue peace with Trump they are more likely to stoke his resolve urging him to continue this struggle against the US on Tuesday last week the state council issued a white paper on US China economic relations emphasizing the pursuit of reasonable solutions through dialogue many interpreted this as an indication that she might be open to discussions with Trump major outlets like a Bloomberg reported as much yet the reality has proven otherwise the document was merely a diplomatic gesture a formality from China's side she's personal determination dictates policy an unwavering anti-American stance and a commitment to wage the tariff war to its conclusion at this stage further tariff escalations by either side had a little practical significance when tariffs exceed 100% goods become effectively unsellable us importers would sooner forfeit deposits than accepted delivery thus the narrative is poised to shift what will she's next move entail i anticipate China may direct its effort from goods to service trade us services export to China amount to roughly $40 billion with a surplus of approximately $20 billion a third of which derives from tourism and education even even a complete embargo would yield limited impact new Tanqin an affiliated social media account of Shinua news agency proposed six major counter measures against the US among them targeting service trade this option has evidently resided within she's repertoire ready for deployment will he employ it today should he do so it would mark an escalation expanding the conflict from goods to services should that avenue be exhausted and both sides exchange further volleys she might then emulate Europe by imposing substantial fines on US technology firms with the service trade already a battleground he would have little compunction about antagonizing those corporations at that juncture Chinese stock would likely face expulsion from US markets by Trump's administration thus I strongly advise against investing in Chinese stocks at the present the risks are exceedingly high she stands isolated the sole leader contending with such exorbitant US tariffs he is undoubtedly feeling vulnerable perceiving global mockery which renders him even less inclined to seek a negotiated resolution with the US he appears determined to pursue this course to its end locked in opposition with the Trump he may well be thinking I need only endure four years thereafter I might find an opportunity to mend the ties with the next US president but with Trump reconciliation is impossible observe China's response now i wager it remains steadfastly defiant committed to opposing the US without compromise thank 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