Every US President since Jimmy Carter has instituted international anti-trade policy at some point in their administration. George W Bush got into a mild trade war with China in 2002 over steel prices. Barack Obama can now add his name to the list, but the scale of the trade war is closer to bun-fight.

The Obama administration has decided to charge a 35% import duty on inexpensive tires from China. This is likely to cause approx $2B in tire imports to be shifted to other places like Mexico & Brazil. US tire manufacturers are not likely to gain any business from this move. In the grand scheme of things, $2B in trade is not a big deal for the US. This is likely just a posturing move to garner support from the left in order to pass a healthcare reform agenda.  

Predictably, China has (so far) retaliated with measured responses applied to US poultry & car-parts exports.       

US officials would have been aware that this action would likely redirect that trade amount to Mexico in a substantial way. Mexico is seeing the beginning of a budget crisis that will last for many years and needs all the help it can get. 40% of Mexico’s federal budget comes from oil sales. But Mexico is rapidly drawing down (running out) its oil reserves. It will be out of oil in approx 9 years. Having Mexico experience a budget crisis will directly impact us here in the US. There have been whispers of Mexico becoming a failed state or needing another bailout.

Every G20 country has increased trade protectionism this year despite unanimous pledges to the contrary. This is not surprising, given the pressure that politicians are under to provide good news and protect jobs to their constituents.

So long as this dispute remains small-time, we should not see an impact to how we invest. With that said, this could get out of hand quickly if China decides to reduce its purchases in US treasury bonds. Even having China sit out 1 week of treasury purchases would be enough to spook international bond markets (and then stock markets and commodity markets). China has approx $800B in US treasuries at this time.

Having a trade war bun-fight with China does not cause us to change our investment policy, but it is something to pay attention to, and does continue to make long term US treasury bonds appear overly risky.