Since there is no longer any reasonable debate about a trade war having started, let's investigate how it ends.

End Game Analysis

The end-game retaliation comes via a global boycott of the Treasury auctions. Foreign entities fund half the US fiscal deficit, which is set to double. Imagine the locals funding their own budget gap! This forces the savings rate up at the expense of spending. Recession follows.

— David Rosenberg (@EconguyRosie) June 19, 2018

Treasury Boycott Thesis

I am surprised that Rosenberg brings this up because in my mind, this hash has been settled long ago.

What exactly would China, Japan, and Germany do with their reserves and ongoing trade surplus? Mathematically they have to do something.

Historically, that something has been to buy treasuries. But I suppose China could buy could be gold or US equities. The latter would be smack in the middle of an obvious bubble.

And if China were to dump US treasuries, the alleged nuclear option, it would serve to strengthen the Yuan. Recall that China sold US treasuries to support the Yuan and stop capital flight. In a trade war, China would not want an appreciating currency!

I think Rosenberg proposes nonsense, but given the nonsensical actions of Trump, I cannot rule out nonsensical or illogical responses.

This leads us to the most logical real threat.

Yuan Devaluation Thesis

China cannot retaliate with enough tariffs on its own to combat tariffs imposed by the US. However, the yuan does not float. China could devalue the yuan enough to counteract the value of US tariffs.

Of course, Trump could ban Chinese imports in response, but prices at Walmart, Costco, Target, everywhere, would skyrocket.

This scenario is nearly the opposite of what Rosenberg suggests. It is also far more credible.

But hold on. It is not without risk. Recall that China sold US treasuries to stop capital flight. If China devalues, there is a strong likelihood that capital flight would intensify.

9. I have long thought it would be hard for Trump's trade action to be so big as to overwhelm the quite large fiscal stimulus now in train for this year and next.

— Brad Setser (@Brad_Setser) June 19, 2018

10. But with up to $250b in tariffs on China/ steel, aluminum tariffs/ the possibility of auto tariffs (finished vehicles are $200b, total imports including parts $350b)/ Chinese retaliation against beans/ & some risk of NAFTA withdrawal, it is now starting to seem possible ...

— Brad Setser (@Brad_Setser) June 19, 2018

Excuse me Brad, but it's now $450 billion proposed.

Lance Roberts Chimes In

TECHNICALLY SPEAKING: The Drums Of "Trade" War - The markets ran into trouble this week as threats of a full-blown trade war escalate. The risk is a full extraction of the benefit of tax cuts. $SPY $TLT https://t.co/xMPUeOkOyd pic.twitter.com/nTdhZ9iA3T

— Lance Roberts (@LanceRoberts) June 19, 2018

Back to Rosenberg

This Tweet makes far more sense.

I attended a Wall St. dinner last night where I was told how the USA is 'oh so sheltered' from a global trade war. These 'pundits' obviously have never walked down the aisles at Walmart or Costco. Shade of grey here between complacency and idiocy.

— David Rosenberg (@EconguyRosie) June 19, 2018

Relax, Nothing Worse Will Happen

This whole thing could blow over. Trump and China may come to an agreement that brings us back from the brink.

Options

• Door 1: Treasury boycott with untested results likely to be hugely negative for everyone
• Door 2: Devaluation with known immediate consequences that are certain to be bad for everybody. The long-term prognosis depends on further retaliations.
• Door 3. Cooler heads back off the crisis a bit.
• Door 4. Every country abolishes all tariff

Realistically, door 4 is closed. Curiously, it's the best option no matter what any other country does.

Winning by Losing

1. Trump Ups the Ante: Trump Now Threatens Tariffs on All Goods from China: $450 Billion
2. A Fed study shows "Tariffs Kill High-Paying American Manufacturing Jobs and Businesses".
3. Auto job losses alone are likely to hit 45,000 as noted in Pandora's Box: Another Look at Steel Tariffs.
4. On June 8, I noted Three US Tire-Chord Makers Threaten to Close Doors Due to Trump Tariffs.

Trump believes China will lose more. This we call "winning".