China's Reaction

I told you that China wasn't going to be happy about the new duties, and that we shouldn't anger them either. I am going to throw you a quote from Bloomberg:

"China's commerce ministry said U.S. tariffs on imports of coated paper are unacceptable and it reserves the rite to take 'necessary' action."

"Necessary" action could very well mean a pending trade war. I want to compare this situation with an analogy, how about a game of poker.

Imagine that the U.S. is playing China in a poker game. The problem is that China has 4 aces and the U.S. is playing with a pair of 3's. In this crazy game of poker China knows the U.S.' hand and the U.S. knows China's hand. The U.S. just placed a bet on the table with its pair of 3's knowing that it has the losing hand. I expect China to take that bet and make a raise on it. In a nutshell, the U.S. is bluffing the losing hand when and both sides know it.

I'm not sure what the U.S. is really trying to do. All China has to do is stop buying bonds/treasuries and diversify its reserves. The just have to flip over the winning hand. Now this might have some negative impacts on the Chinese economy, but it will be disastrous for the U.S. economy.

The media is really trying to spin this off as China being the bad guy here. They are saying that China broke World Trade Organization (WTO) rules by illegally subsidizing goods in which China exports. These subsidies are true, but whether or not they are illegal is another story. I'm not well read enough on WTO regulations to make a judgement on the situation.

The final point I would like to make on the topic is that China is a very nationalistic country. They will not be pushed around by the U.S. or any other country for a long time. I expect them to make a strong statement in their counter actions to these duties.

As this whole situation plays out, look for the dollar to move much lower. This might be the final push that moves the USD index below the ever important 80 level. I expect gold to fly high on this news and future actions from China's commerce ministry. Also remember that the U.S. made it sound like this isn't the only tariff that they will slap on Chinese imports. Stay tuned...