America's trading partners have a mighty weapon in the trade war
America's trading partners have a mighty weapon in the trade war
In the past few days, a comment by the Japanese finance minister Katsunobu Kato has caused a stir. He knew that Japan, as the largest owner of US state bonds in the trade talks with Washington, consider the option of selling these bonds. This threat was considered a kind of ultimate financial weapon in the context of collective bargaining. Loud Associated press said Kato: "It is available as a means, but whether we use it or not is a separate decision."
reaction of Japan to his own threats
A few days later, Kato rowed back and made it clear that Japan was "not considering the sale of US state bonds as a means in negotiations with the USA." The likelihood that Japan will actually take this drastic step is estimated to be low. Experts see the sale of US state bonds as an extreme step that probably would have negative consequences for Japan himself. Nevertheless, this temporary threat reveals an unpleasant truth: The United States strongly depends on other countries that other countries are theirJapan as the most important believer in the USA
Japan currently holds bonds worth $ 1.1 trillion. This gives Tokyo a certain influence when it comes to negotiating a trade agreement with Washington. A massive sale of US debt could trigger a massive decline in bond courses, which would result in the interest rates would increase sharply. This would make borrowing for Washington more expensive and investors unsettle.
"If one of the most reliable buyers of government bonds is no longer active in the market, the shock waves would send the global financial markets," said Ernie Tedeschi, director of the Budget Lab of the Yale University and Senior Economist in Biden Administration.
The reactions of other creditors
Washington doesn't just rely on Japan. China has imposed tariffs of at least 145 % on most goods, but also remains America's second largest foreign creditor with debts of $ 784 billion (as of February). With a 10%customs, the United Kingdom also has an important role as the third largest creditor with $ 750 billion in US state bonds. Canada, as the fifth largest owner of US state bonds, also faces other trade restrictions if it does not join the USA as a 51st state.
The sale of US debts, especially in the form of a bargain, would bring the risk of worldwide markets and their own for these nations.
The risks of debt disposal
Such a step would also endanger their own investments and that of their banks and citizens. The currencies of these countries could strongly gain value, which would make the export of their goods more difficult. "Threatening to sell an asset that you keep in large quantities could damage Japan himself," wrote Win Thin, global market strategist at Brown Brothers Harriman, in a message to customers. This type of threat is "always a double -edged sword."
The opinion of Mauricio Obstfeld, Senior Fellow at the Peterson Institute for International Economics, the comments of Japan is similarly critical: he described it as "very hasty" and "simply a stupid reaction."
macroeconomic implications of trade tariffs
Obstfeld continued that nobody wanted to sell a large amount of government bonds quickly, as this would mean considerable losses for the entire portfolio (and Japan's portfolio is huge). This could also result in massive retaliation tariffs. As Obstfeld notes, Japan Washington needs to defend himself in the conflict-loaded Asia-Pacific region. It would be unclear to do something that could sow doubts about the military support of the Americans.
"The fact that US state bonds are central to the global financial markets makes it really difficult to harm the United States-without harm," said Tedeschi from Yale.
Another important point is that both theory and data show that trade tariffs reduce net capital inflows, explained Kent Smetters, professor of business administration and public policy at the Wharton School of the University of Pennsylvania. Smetters, who heads the Penn Wharton Budget Model, found that capital actually left the United States and rose interest rates before Trump announced his break for the so -called "mutual tariffs"."If the tariffs are carried out, it will be necessary for the United States to sell its future debts ... at lower prices and higher returns," warned Smetters. "More tax cuts instead of mitigating some of the negative effects of the tariffs will contribute to debt load while it is becoming increasingly expensive."
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