E Four Signs Trump Could Ignite A Cold War With China

It appears the there are at least 4 signs that the trade war initiated by Donald Trump will turn into a real Cold War with China. Make no mistake, a cold war with China could turn into a hot war over Taiwan, the South China Sea, or through massive interference with US companies in China.

Here are the 4 signs that we are headed toward a serious breakdown in the relationship between the US and China. We are not there yet, but we are getting close unless cooler heads prevail:

1. The US places tariffs on Chinese auto parts. US cars contain Chinese parts that are impossible to replace, quality-at-the-price wise. This shortage could be first inflationary, as prices go up, and then deflationary as demand suffers. This could be made worse if the Federal Reserve is fixated on inflation as it was in 2008, while deflationary pressures took over. The following chart shows exactly how this can happen:

The Fed was watching inflation in the Great Recession, which held true, while GDP and demand was already crashing.

2. If China is forced to lower the value of its currency to offset tariffs, this could leave the US vulnerable to a strong dollar. China has assured a stable currency to prove to the US that it is a trustworthy trading partner. If there is no further partnership, this sign will be obvious. So far China has promised to keep the Yuan at less than 7 per dollar. It is at the top of the range now. 

In  the meantime, the Yuan has dropped relative to the Euro and the Yen. This weakens our allies ability to export to China. Purchasing power parity means that China is strong because it makes most of what it needs and can keep a standard of living simply by substituting Chinese products for Eurozone and Japanese products. This is a financial disaster for Japan and the Eurozone and could eventually catch up to the United States as well. Any spillover past 7 Yuan to the dollar will signal a significant escalation in the trade war and it is now at 6.92.

3. The US will do more to try to damage Huawei, which will indicate an escalation of the trade war. Greater damage to Huawei, however, may have an unintended consequence of hurting rural Oregon and Wyoming internet customers. As we see from Business Insider:

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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Gary Anderson 9 months ago Author's comment

Update 1: Trump's executive order to ban chips and cell designs from the USA, especially ARM designs to Huawei, does cross the line, making the trade war far more dangerous. Arm is a UK company, but with some critical USA components. China's response could be hostile. That nation could ban rare earths to the west, or simply ban Apple and Samsung sales into China. That is the biggest and fastest growing market in the world.

Bruce Powers 9 months ago Member's comment

Yes, we're getting close to just that.

Black Widow 9 months ago Member's comment

Great, from #tradewar to #coldwar. Could things get any worse?

Gary Anderson 9 months ago Author's comment

We have history to teach us. Tariffs in the Great Depression led to Adolph Hitler. Trump admires strongmen. He is, so far, adverse to hot war. Perhaps this will be the only attribute that saves him and us. But he could also paint himself into a corner.