Trade Wari?

China has recently threatened $50 billion in tariff retaliation against the equivalent planned tariffs by the United States against China ... thus raising the spectre of a trade war. Is this a serious threat? Let's first look at the numbers: in 2017 China exported $560 billion of goods and services to the U!S. and we, $185 billion to it ... for a total U.S. trade deficit of $375 billion, see: NY Times Article. Although China is the second largest economy in the world, it exports to the U.S. represent a far bigger proportion of its GNP than our exports to them.

Now there is in game theory the notion of the optimal gaming strategy being minamax ... minimize your maximum loss. Therefore, if China and the U.S. get into an all-out trade war, reducing both these trade numbers to zero, China would be far more damaged ... probably to the point of massive social disruption. Using game theory, which I am sure China understands, the United States does have the strategic high ground in this pissing contest.

OK, but China does own well over a trillion dollars in American government debt. Can't they use this as a cuddle against Trump's tariffs? But Trump knows this game quite well from his previous banking relations  -- when you owe the banks a huge amount of money, they don't own you ... you own the banks. If China were to start selling this U.S. debt, it would drive down the prices on that which it still holds ... and also, in the process, make the Federal Reserve Bank's job of paring its balance sheet easier.

Trump has stated that his objective is to reduce our trade deficit with China by $100 billion over the next year. Obviously, an all-out trade war would accomplish this ... but also would serious talks with China wherein Trump uses our above negotiating leverages effectively ... much more likely the latter than the former.