Markets focus on Sino-US confrontation - April 14, 2025
The turnaround in US trade policy in favour of a 90-day negotiation process (excluding China) has allowed a fragile stabilisation of the stock markets. The economic and financial stakes of the Sino-US confrontation are now the focus of attention not only for investors, but also for the US Federal Reserve.
Forced to recalibrate his trade war due to the increasingly negative reactions of the financial markets, Donald Trump is focusing his action on one country, China, against which he is sure to have political support. However, the economic feasibility of the operation remains doubtful. Taken literally, the extravagant tariffs announced by the two countries, around 100%, are the equivalent of an administrative ban on bilateral trade (graph 1).
If these tariffs were definitively applied to all goods, China would lose more than 400 billion dollars in exports at worst, while the United States would lose ‘only’ 150 billion. But in reality, the United States is now more dependent on China than China is on the United States (graph 2). American manufacturers, for example, are three times more dependent on Chinese inputs than Chinese manufacturers are on American inputs. Part of American industry would therefore no longer be able to produce (except at a loss), as its Chinese inputs would become unaffordable. As for American distributors, they would have to destroy demand by raising the average price of their sales.
Until serious negotiations begin, pain relief will come from several fronts. First, exemptions for the products on which both countries are most dependent, as already announced on the Chinese side for semiconductors. Safeguard measures for the sectors most affected by the loss of the external market will multiply, including for example American agriculture. And more general measures to support the economy, with an expected strengthening of the Chinese reflation plan, tax cuts and financial deregulation in the United States.
Moreover, as the United States has for the time being renounced imposing tariffs of more than 10% on the rest of the world, it will still be possible for Chinese manufacturers to move the assembly of their production to other countries, as has already been the case to some extent since the first trade war of 2018-19.
Finally, the Sino-American trade war could take a more subversive form, as rumours of Chinese sales of US Treasury bonds multiply. China holds about 2.5% of US public debt. For the first time since the beginning of the year, we have seen the dollar fall and US long-term rates rise at the same time in recent days (graph 3).
It is possible that China is behind these movements, but it is also possible that this reflects a more general problem of confidence in US assets. If this worsens, the US Federal Reserve will have no choice but to intervene quickly to safeguard financial stability, much as the Bank of England successfully did during the Liz Truss crisis in September 2022.
Dorval AM's global diversified funds are fully hedged against dollar currency risk. We have started buying calls on 10-year Treasury bonds. The recent correction offers entry points on an asset that would increase in value either in the event of a sharp US economic slowdown or in the event of a détente on the trade war front. In addition, the dollar value of Treasuries is de facto guaranteed by the Federal Reserve as a last resort.