Is it wise to pick a fight with your biggest creditor and trading partner? That is one of the more intriguing questions posed by the prospect of US President Donald Trump . During the campaign, the man who will shortly hold sway over the world’s main reserve currency threatened to brand China a currency manipulator and to impose punitive tariffs to curb the country’s bilateral trade surplus with the US, which is running at close to $400bn a year.
Since China’s official foreign exchange reserves amounts to $3.1tn, much of which is invested in the US Treasury market, there is scope for devastating retaliatory action that might destabilise global bond markets and inflict serious damage on the world economy.
The nature of this mutual dependency is that Americans have, in effect, been borrowing from the much poorer Chinese at exceptionally low rates of interest in order to buy the cheap goods that they turn out. Yet the benefits of this subsidy to the American consumer have been won at the cost of lost jobs in mature industries across the US.