The United States could lose its largest investor
China invests the trade surplus it has with its trading partners in US government securities (GOVT). According to the data available from the US Treasury, China owns close to 20% of total outstanding US debt, and the total value of these securities is close to $1.2 trillion.
To put it simply, China is lending the United States money to buy its products and to help with the economic progress of the Chinese economy. A reduction of the trade surplus could mean that China buys fewer US securities, which could lead to major problems for financial assets.
Lack of buyers could push yields higher
At a time when the Fed is reducing its balance sheet’s bond (BND) holdings and the US Treasury is issuing huge quantities of debt to fund the fiscal deficit, a dearth of buyers could push bond (AGG) yields higher. Add rising US interest rates to this mix, and we likely have a giant problem ahead.
Bond (TLT) prices in the United States and across the globe could plummet because of such increased supply and low demand. Borrowing costs for companies could increase as yields shoot up, and that could impact their profit margins, which could have a negative effect on equity markets (SPY).
No country comes first
To summarize, getting China to buy more American products isn’t likely to have a long-term positive effect, even in the United States. The objective of trade negotiations should be to reduce the barriers to trade rather than to increase selective bilateral trade.
The US deficit is being funded by foreign capital, and if trade grows, there shouldn’t be any worry about the trade deficit. The American consumer benefits from such a scenario. No country comes first in a globalized economy—everyone must move forward together.