A possible trade war has been looming over the U.S. since the Trump administration signed proclamations on March 8th, which imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports.
Two countries were said to be exempt from the tariffs: Canada, the top exporter of the two metals to the US, and Mexico, the fourth largest exporter of aluminum. Other allies of the U.S. have not been excluded, so they will bear the tariffs.
While the goal was to protect the US steel industry from foreign competition, top economists warned that a trade war was inevitable if the tariffs were put in place.
A recently reported trend seems to suggest that the coming trade war may be worse than we had initially thought.
On Thursday, the Treasury Department published an alarming data set that showed that China's holdings of U.S. government debt experienced a sharp decline in January, falling to a six-month low of $1.17 trillion.
China, who remains the top foreign holder of U.S. Treasury debt, has slowly been reducing its investments. This is a stark contrast to last year. During 2017, Chinese holdings of U.S. Treasuries rose 13%.
Earlier this year, Bloomberg supported the data in a report that claimed that China had been trying to cut back on the amount of U.S. government debt that it buys.
This report was quickly shot down by Chinese authorities.
Stephen Innes, the head of Asia Pacific trading at Oanda (an investment firm), assured that “US Treasuries are often used as a carrot during the political ping-pong match when trade tensions escalate.”
The data published on Thursday only covered up until the end of January, so it failed to include the effects of recent trade tensions, such as Trump's latest tariffs.
The trend in the data did seem to coincide with other economic policies, such as Trump's import tariffs on foreign solar panels and washers in January. These were seen as a severe disadvantage and economic attack on China.
The new tariffs on steel and aluminum may have caused a negative effect.
The U.S. trade deficit with China hit an astonishing $275 billion last year, according to the Commerce Department. This trade deficit puts China in a commanding position as the largest of any trading partner. President Trump has used this fact to garner support from the public for slashing the deficit.
Finally, Innes also added that it would make sense for China to gradually reduce its holdings. He made the argument because the US dollar has weakened by approximately 10% in the last year.