In itself the development will have a limited impact. Textiles only account for a small proportion of trade between America and China.
The danger is that it spirals into a broader conflict. A trade war between America and China would not just affect those two countries but the whole world. Indeed it is probably the biggest risk facing investors today.
The reason that such a conflict would have such a great impact is the “vendor fi
nancing” relationship that has developed between Asia and America. Essentially the stability of the world economy and global stockmarkets has come to depend on this relationship.
In many ways this is akin to the way that manufacturers, such as car producers, have lent consumers money to buy their goods. By lending a consumer money to buy a car the manufacturer helps to bolster demand for its own products.
Grander scale
This is basically what is happening, on a grander scale, between America and Asia. Essentially the US is playing the role of consumer while Asia is the manufacturer.
Asia is exporting a huge volume of manufactured goods to America. As a result it is accumulating vast amounts of dollars. These dollars are then lent to America – often in the form of purchases of US Treasury bonds – so that it can carry on buying Asian goods.
The scale of capital flows associated with this relationship is enormous. According to Legal & General almost half of US Treasuries are now owned by foreigners compared with 20% in 1995. Other asset types have also been affected: for instance, 12% of American shares are now owned by foreigners against 7% in 1995.
Asian central banks are the largest purchasers of US Treasuries. Out of a total of about $3.4 trillion (£2 trillion) in circulation, Japan owns $389 billion, South Korea $136 billion and China $119 billion.
The irony is that, at least for the time being, both parties are benefiting from this relationship. Asia is selling its goods and America is staying afloat.
Europe benefits
Although Britain is not directly involved it also gains from the stability that such capital flows offer. Europe also benefits from an economy that is more stable than it would be otherwise.
Unfortunately the forces of protectionism threaten to undermine the stable relationship between America and Asia. Although it is in no one’s interest for relations to break down there is a danger that the drive to protectionism could develop a dynamic of its own.
It would be naïve to dismiss this as a trade question with little bearing on investment. Although the prospects for a gentle recovery seem reasonable the possibility of protectionism is the main danger that investors face.
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