This Is Only Act One of U.S.-China Trade Tension  

At a Glance

  • Further escalation between the U.S. and China could make U.S. Treasuries less dependable

The rising tit-for-tat trade skirmishes between the U.S. and China are giving stock markets serious jitters, as well they should.  Trade flows power global growth, which is currently on a synchronized upswing.  If trade flows get seriously disrupted, global growth will slow down, and equities will reflect the bad news and head for bear-market territory.  So far though, the Chinese responses to U.S. trade tariffs have been mostly symbolic, designed more to send a political message than have any significant economic impact.

But market dynamics have been affected by the trade skirmishes.  The U.S. buys consumer goods from China, which in turn buys a mix of goods and services from the United States. However, China also buys U.S. Treasury securities.  If China was to lose its appetite for U.S. Treasuries, yields could rise.  Put another way, if a U.S.-China trade war breaks out in earnest, U.S. Treasuries will not be nearly as dependable a safe haven in an equity storm as they once were.

It is worth a reminder that every trade is financed. This does not mean that trade flows drive capital flows.  To the contrary, trade and capital flows are part and parcel of a complex system.  Mess with trade flows and there will be ‘unintended’ impacts on capital flows.  Equally, disturb capital flow and there will be an impact on trade flows.

Now might be a good time to mention that the U.S.-China trade dispute is playing at only one theatre in the district.  We also have the U.S.-Canada-Mexico tensions over NAFTA.  If the U.S.-China dispute is any guide, the U.S. is very close to unilaterally pulling out of NAFTA.

Then there is the UK-EU Brexit deadline for a trade union deal by March 31, 2019.  The two sides have verbal, non-binding comprises on the easy transition issues.  But no progress on the open border issue with Ireland suggests that as the deadline approaches and no deal emerges, there might be no deal.

No wonder equity markets are volatile.  Intraday swings can be even more impressive than   day- to-day changes.  Hold on to your hats.  Trade wars are easy to start but very difficult to end, with many unintended consequences.  We are only at Act One.  And, there is no relief break for humor until Scene One, Act Five, if Shakespeare is any guide.

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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