Donald Trump proved that he doesn't back down from a fight and pulls no punches when it comes to promoting American interests. His twitter rant about the unfair trade practices of China and the European Union was literally heard across the world and rattled the global stock markets.
"The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of US for years. They laugh at what fools our leaders have been. No more!" he wrote.
The reaction of the global stock markets is understandable because trade wars are bad for business, and Trump is not going to win a global war quickly or easily. Both China and the European Union slammed the new punitive tariffs on imported steel and aluminum. The new tariffs will protect the US producers, but Trump now risks retaliation from America's biggest trade partners, including China, the European Union and even neighboring Canada.
READ MORE: US-China Trade Standoff: Journalist Predicts Beijing’s 'Tit-for-Tat Retaliation'
The biggest risk for Washington is that all affected countries can form an ad-hoc anti-American alliance, targeting the most sensitive American industries in order to maximize the job losses in the areas that will play a major role in the next presidential election. Trying to simultaneously take on China, the European Union and Canada in an all-out trade war will go down in history as either the boldest move of the Trump presidency or the move that ruined his political career and the US economy.
The political logic behind the weird choice of retaliation targets was revealed by a Bloomberg analyst, who noted that "Harley-Davidson is based in House Speaker Paul Ryan’s home state of Wisconsin, while bourbon whiskey hails from Senate Majority Leader Mitch McConnell’s home state of Kentucky. San Francisco-based Levi Strauss is headquartered in House Minority Leader’s Nancy Pelosi’s district."
If China, the European Union and Canada all decide to target specific vulnerable American companies, especially in the swing states, Trump will have a hard time explaining the benefits of his trade war to the tens of thousands of disgruntled workers who are likely to lose their jobs.
READ MORE: IMF: Trump's Steel, Aluminum Policy Could Hurt World Economies
However, the most painful and efficient form of economic retaliation available to Brussels and Beijing would target an intangible, yet crucial form of American exports, the US Treasury bonds. People rarely think of bonds as an export item, but for the purposes of an all-out trade war, targeting bonds is just as efficient or sometimes more efficient than targeting conventional imports from the US. Consider a startling data point brought by Luke Gromen from FFTT research company: "The US' biggest export (by far) from 1999-2014 were exports of US Dollars/US Treasuries. Exports of USDs averaged $667 Billion/year for 15 years, an amount three times bigger than the US' #1 export in 2016 alone (Machines, Engines, & Pumps = $205 Billion)."
Both Xi Jinping and the European Commission have the tools necessary to target the US Treasury market. Chairman Xi can instruct the China's State Administration of Foreign Exchange to stop buying the US Treasury bonds or even start selling bonds from its existing US bond portfolio. The central banks of the EU countries are independent so, Jean Claude Junker can't issue a similar official order, but all central bank governors are political appointees that are likely to do what the European political leaders demand from them. Moreover, the European Union may impose a special tax on US Treasuries held by private European investors, forcing them to sell their US Treasury bonds.
What happens then? If a significant number of foreign investors are forced to sell their US bonds, or if the European Union and China both decide to sell the US bonds held by their respective monetary authorities, the likely outcome is the so-called "Bondageddon".
The "Bondageddon" is best described like a perfect storm roiling the US financial markets: the yields on the US Treasuries spike, dragging down the bond prices, the dollar falls and then the stock market goes into full-panic mode. While it is debatable whether the foreign investors can inflict the damage necessary to provoke the "Bondageddon", the most likely answer is 'yes', mainly because they hold a combined portfolio of around $6 Trillion worth of US Treasuries and because the US bond market will be very vulnerable in the next several years, due to the increased issuance of Treasuries, required to finance the gargantuan deficit of the US federal budget. Ironically, the “Bondageddon” may be triggered unintentionally by the actions of the Trump administration, with no help from Europe or China.
Of course, an apocalyptic financial event such as the "Bondageddon" will inflict tremendous collateral damage, affecting both the EU and China. However, a severe economic downturn, combined with a financial market crash, will surely prevent Trump from winning a second presidential term and this is why his political opponents across the world and in the US may be tempted to provoke the "Bondageddon" just to get rid of him. The huge amount of debt accumulated by Trump’s predecessors has left a ticking financial bomb in his hands. If he doesn't find a way to disarm it, it is only a matter of time before it blows up along with the American economy. Does he have a solution to this problem? So far, the answer is ‘no’.
The views and opinions expressed by Ivan Danilov are those of the author and do not necessarily reflect those of Sputnik.