As the US and China edge towards trade war, will cooler heads prevail?

SINGAPORE (July 30): Amid rumblings of a potential full-blown trade war, it is important to understand why the current US administration has opted for this path, which in some states in the country is seen as politically attractive. 

The US current account deficit in 2017 was US$462 billion ($631.7 billion), the largest in the world. The main cause of this is its US$566 billion trade deficit. Interestingly, the world’s largest surplus economies in 2017 were the European Union with US$387.1 billion and China with US$162.5 billion. Hence the current attacks on the EU and China by the US administration.

In order to sustain its economy and its twin deficits, the US has to borrow money. (It also has a budget deficit that is likely to balloon this year and next, given its generous tax cuts.) The US funds its deficits by issuing US Treasury notes. As the federal government guarantees the Treasury notes, they are viewed by investors as the safest in the world. The largest owner of US Treasuries is the nation’s Social Security Trust Fund and the largest foreign owner is China. 

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