Mr. Trump’s corporate tax reduction plan’s ultimate aim is to prevent U.S. corporations from moving abroad to lower tax haven countries. By setting tariffs on imports, corporations are forced to domicile in the U.S. where they will receive favorable tax treatment. Examples are Apple, Ford and GM beginning to move production back to the U.S.
The trade war with China has only just begun. In the beginning of the trade dispute, China tried to subsidize it’s stock markets by buying their own stocks in order prop to up their bourses. It was a ill thought out plan as large Chinese corporation such as Tencent, Alibaba and Baidu are listed internationally including adr’s on Wall Street where they are bound by international securities regulations and strict accounting procedures. Chinese state buying would have to be done in U.S. dollars or the European Euros. Today, Chinese stock markets are in correction territory with 25 percent losses accumulating from the beginning of the year. In contrast the S&P 500 is 2 percent below its all time high reached in January. China’s ultimate aim is to accumulate U.S. dollars and European Euros. Thus this strategy was soon given up as it would reduce China’s foreign currency reserves. China’s printing of its local currency is secretive and used for any imaginable machination to scoop up dollars and Euros. China’s devaluation of its currency over the past few months is a dangerous and fool hardy option as Mr. Trump has just raised his tariff plan from 10 percent to 25 percent as a countermeasure on the following 200 billion dollars of Chinese exports. China third option is to sell its 1.15 trillion $ of U.S. treasuries. Anyone familiar with bond trading is aware that selling pressure increases the interest rate of treasury bonds which inversely incurs losses on a massive scale. Selling treasuries would ultimately dissipate their U.S. dollar holding for their local currency. Switching from the U.S. benchmark 10 year treasury bonds currently paying 3 percent to German or other triple A rated 10 year bonds in the Euro zone that pays less than 0.50 percent or Japanese 10 year bonds paying less than a tenth of one percent is an absolute lose lose situation. Buying gold is not an option as the U.S. is by far the largest gold holder in the world and any country who dares play a fool’s game with gold could find themselves in deep trouble should the U.S. decide to release gold into the market like they have done on previous occasions with oil reserves to lower the price of oil when OPEC tries to manipulate the price.
In an extreme case of increased treasury selling or the CBOE VIX volatility index spiking, the U.S. Treasury Department would simply instruct the Federal Reserve Bank to bang out 1.15 Trillion $ in an unconventional Q.E. fix. Mr. Trump has installed the current Federal Reserve Bank chairman, Mr. Jerome Powell as well as the new vice chairman and another 4 new Federal Reserve district bank presidents.
The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. CompaniesThe attack by Chinese spies reached almost 30 U.S. companies, including Amazon and Apple, by compromising America’s technology supply chain, according to extensive interviews with government and corporate sources.
China’s trade surplus with the U.S. is approaching 400 billion U.S. $ per annum. For an 11 trillion economy this is equal to approximately 3.5 percent of GDP. Mr. Trump and his financial advisers would like to erase this surplus and bring supply chains back on to U.S. soil. Doing the math, it clearly shows that U.S. GDP growth would go from 4 to 6 percent while China’s GDP would decline from 6.5 to 3 percent. This is the crux of Mr. Trump’s trade war. China’s subsidies to local companies are blatant violation of WTO rules and its illegal and forced technology transfer from U.S. and European companies are seen in the west as intellectual property theft. Should the Europeans side with the U.S. then China’s financial house of cards will come crashing down.
In the second world war Japan’s bombing of Pearl Harbour is remembered as the awakening of the U.S. giant. Mr. Trump’s trade war is the same awakening of the world’s largest economy. China’s illegal maritime activities in laying claim to the South China sea with man made islands is against the United Nations international sea conventions article of which China is a signatory. The United Nations world court in the Hague has ruled that these man made islands do not conform to nor constitute legal maritime boundaries but the Chinese continue on in their dubious activities. Mr. Trump’s reaching out to Russia can be seen in this light as broaching Moscow to isolate and contain China on its northern border. Mr. Putin is quite aware that China and not the U.S. is potentially Russia’s greatest enemy, financially and militarily.