The market is betting the devaluations that follow

There’s a revealing puzzle in the China tariffs

The market sensitivity to threats and counter-threats in the trade war is quite remarkable. Monday’s announcement by the Chinese, for example, would be expected to raise China’s tariffs by about $10 billion. Much of this will show up as higher prices for Chinese importers, and some of it will be avoided by diverting exports of goods such as liquid natural gas to other markets, so the impact on U.S. corporate profits will be far less than $10 billion. Meanwhile, U.S. tariffs are likely to raise corporate profits as higher import costs push some business to domestic producers.

A rebalancing is taking place, it will include a round of devaluations.

What is the bet? It is tricky, if we do a good job, everyone is better off, and visa versa. So we have this binary bet. There is every historical likelihood  that we can improve the process, but it is not a guarantee.