Macroscope | Why time is now for America’s Asian creditors to flex their muscles

US President Donald Trump has a fixation with imports into the country. His aggressive trade policies are designed to revitalise American manufacturing by curbing cheap imports and encouraging companies to reshore their operations. In Trump’s view, countries with the biggest bilateral trade surpluses with the United States are the ones that should be punished severely.

This is why Asian economies – which account for seven of the 10 economies with the largest trade surpluses with the US – bore the brunt of the “reciprocal” tariffs Trump unveiled on April 2 and subsequently paused for 90 days on April 9. Yet while Trump complains about imports incessantly, he barely mentions US exports.

The biggest US export is financial assets, in particular US Treasury bonds, the world’s largest and most liquid debt market. According to data from Societe Generale, foreign investors – which include official sovereign investors such as central banks as well as private ones such as pension funds – hold about 30 per cent of US Treasuries. The largest and third-largest foreign holders of Treasuries are Japan and China, respectively, which together account for more than one fifth of international holdings.

The keystone of the global financial system along with the US dollar, Treasuries have long been viewed as the gold standard of securities. There is practically no credit risk and scant chance of default since the US issues debt in its own currency. Treasuries have historically benefited from their status as a safe haven, offering buyers stability, predictability and all the institutional and economic strengths associated with the US dollar’s role as the world’s pre-eminent reserve currency.

But in the past 15 years – and especially since Trump won the 2016 presidential election – the appeal of Treasuries among international investors has waned, with the share of US debt held by foreign buyers steadily declining since the 2008 financial crisis. The combination of political dysfunction, chronic fiscal mismanagement and ballooning debt and deficits has underscored the failure of US politicians to commit to meaningful reforms, putting US creditworthiness under strain.

Trump’s reckless trade policies, coupled with his blatant disregard for the rule of law and repeated meddling with the independence of the US Federal Reserve, have heightened concerns about the status of the US as a safe haven. On May 16, Moody’s Ratings belatedly stripped the US of its coveted triple-A credit rating, joining its two main peers – Standard & Poor’s and Fitch Ratings – in downgrading the US because of the sharp deterioration in public finances and the erosion in standards of governance.