First thing this morning, when the market was surging and inexplicably rejoicing in the certainty that Trump would back down on tariffs, a nagging feeling that this was all wrong prompted us to ask "What If Trump Does Not Back Down", and to follow it up with a troubling rumor from Strategas, namely that this is all about China, and would involve a massive amount of tariffs, to wit:

Trump himself has also said that the trade wars have one major target: Beijing, with the rest of the world negotiable collateral damage. Just yesterday, the US trade rep made it clear that both Mexico and Canada would get an exemption from the tariffs once they agreed to a "fair" renegotiation of Nafta. And beyond the already announced aluminum and steel tariffs, there is another far more troubling aspect, or rather number, to Trump's protectionist push noted by Strategas. The number is $1 trillion. Here is Strategas: President Trump is considering imposing tariffs on Chinese goods in response to China stealing US intellectual property. This is often referred to as Section 301 and President Trump specifically mentioned this action in both his Davos and State of the Union speeches. The rumor around DC is that the US will impose $1 trillion of tariffs, which would shock financial markets. We believe the $1 trillion number is too high. Since the US imports $450bn from China, across the board tariffs would need to be 200 percent. Even for Trump that is too much. But given the magnitude of what is being discussed, China would need to respond. If Strategas is correct, and if Trump's ultimate intention is to hit China with tariffs in the "hundreds of billions" (or more), it's on, and the resulting trade wars will promptly cripple all China-facing US corporations first, followed by the rest of the S&P.

This afternoon, with the unexpected resignation of Gary Cohn, this was partially confirmed, however the full confirmation that it was indeed, all about China, came moments after the Cohn news, when Bloomberg reported that the Trump administration is considering clamping down on Chinese investments in the U.S. by slapping tariffs on a broad range of its imports in response to alleged intellectual-property theft, according to people familiar with the matter.

The U.S. actions would result from the U.S. Trade Representative’s 301 investigation into China IP practices, and will hardly be a surprise now that Trump's chief trade advisor is Peter Navarro, author of such books as "Death by China" and "Crouching Tiger: What China’s Militarism Means for the World"

As Bloomberg adds, under the most severe scenario being considered, the U.S. could impose tariffs on a wide range of Chinese imports, from shoes to consumer electronics.

Additionally, the White House could combine the tariffs with restrictions on Chinese investments in the U.S., which are reviewed for national-security risks by the Committee on Foreign Investment in the U.S., the Bloomberg sources said. The U.S. is also considering a more targeted approach that would seek to rein in Chinese investments

Furthermore, the White House is looking at ways to enforce reciprocity with China on foreign investment, meaning the U.S. would only allow takeovers in sectors that U.S. companies can access in China.

There is still a chance that a trade mushroom cloud could be avoided: officials told Bloomberg that they are still examining various options, and USTR could decide to do nothing.

However, when the announcement is made, sometime in April, we doubt it will be nothing. In fact, we are quite confident that when the dust settles, Beijing will be quite furious at Washington.