Wall Street Fears a Trade War

The market is lower today on fears of a trade war between the United States and China. On Friday, the Obama Administration enacted steep (35%) import duties on Chinese passenger vehicle tires. This is a political response to the rise of Chinese tire exports that cost thousands of U.S. jobs. Over the last five years, U.S. imports of Chinese tires have more than tripled, from 14.6 million in 2004 to 46 million in 2008. Four U.S. tire plants have closed since 2007, and over 5,000 workers have lost their jobs.

Given China’s frustration with its sinking U.S. dollar holdings and sinking U.S. exports in other areas, this politically popular move could push China into retaliatory protectionist measures. The Chinese have already said that they “strongly oppose” this “serious act of trade protectionism.”

At the very least, China may become more reluctant than ever to buy U.S. Treasury and agency debt, which could force the Fed to monetize even more debt. In other words, a trade war with China and the U.S. may already be underway.

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