United States – China: The Dangers of a Currency War
In response to Donald Trump's threats of new tariffs on Chinese imports, Beijing has let the yuan fall − a bit − triggering Washington's ire. This escalation does not bode well.
The escalation is mostly verbal for the moment, but it foreshadows worse problems. By letting the yuan devalue − a little − on Monday, Aug. 5, Beijing triggered the ire of Washington, which immediately formally accused China of manipulating its currency. Such an accusation "severely ruins the international financial order, triggering financial market turmoil," China replied the following day. Trade tensions are worsening and seem to be leading to a currency war, which risks weakening an already fragile global economy.
Allowing a decline in the yuan, which doesn’t have a free-floating price, is the People’s Bank of China’s response to the new 10% tariffs that Donald Trump is threatening to impose on $300 billion of Chinese imports that were so far spared. But make no mistake: In recent months, the People’s Bank has mainly worked to prevent excessive depreciation of the yuan, or renminbi (the official name of the Chinese currency). Excessive depreciation is likely to trigger an outflow of capital from the country, and not the other way around. Many observers point out that the United States has made the "currency manipulator" accusation at the wrong time, at least five years too late.
But it doesn't matter: Given the level of tension, a single act or a single word said too loudly can spark a crisis. And we are already seeing the downward spiral in which the two superpowers are in danger of getting caught up. In response to the decline of the yuan, the United States could impose new retaliatory measures on Beijing, which could respond by letting its currency fall further or by retaliating in turn. In response, the U.S. president could urge the Treasury to also intervene in the foreign exchange markets to weaken the dollar and boost the competitiveness of American exporters.
Collateral Victims
Such a maelstrom would force the other major central banks − starting with the European Central Bank − to intervene in turn to support their economies. It would unleash a storm on the currencies of emerging economies, the collateral victims of trade tensions.
The two countries might find common ground. However, the escalation over the last few days makes it seem unlikely. Beyond Trump's accusatory tweets and Beijing stating it was offended in response, the attitude of both sides gives rise to fears that neither one truly intends to reach an agreement in the near future. Already campaigning for the 2020 presidential election, Trump is betting that a hard-line stance concerning China will earn him points. In the U.S. administration, some are convinced that Chinese leader Xi Jinping’s inner circle is waiting for Trump to leave office to negotiate a more favorable agreement.
While the Communist regime knows that Trump’s attacks are chiefly aimed at ensuring his reelection, its position is more complex. In theory, it has enough ammunition to maintain a long trade and monetary front against the United States. In such a scenario, Europe would be the big loser. A Sino-U.S. struggle for a weaker dollar and yuan would automatically push up the euro, hitting the continent’s industrial exports, which have already been penalized by the German automotive crisis. It wouldn’t take much, then, for Europe to plunge back into a recession.
The escalation is mostly verbal for the moment, but it foreshadows worse problems. By letting the yuan devalue − a little − on Monday, Aug. 5, Beijing triggered the ire of Washington, which immediately formally accused China of manipulating its currency. Such an accusation "severely ruins the international financial order, triggering financial market turmoil," China replied the following day. Trade tensions are worsening and seem to be leading to a currency war, which risks weakening an already fragile global economy.
Allowing a decline in the yuan, which doesn’t have a free-floating price, is the People’s Bank of China’s response to the new 10% tariffs that Donald Trump is threatening to impose on $300 billion of Chinese imports that were so far spared. But make no mistake: In recent months, the People’s Bank has mainly worked to prevent excessive depreciation of the yuan, or renminbi (the official name of the Chinese currency). Excessive depreciation is likely to trigger an outflow of capital from the country, and not the other way around. Many observers point out that the United States has made the "currency manipulator" accusation at the wrong time, at least five years too late.
But it doesn't matter: Given the level of tension, a single act or a single word said too loudly can spark a crisis. And we are already seeing the downward spiral in which the two superpowers are in danger of getting caught up. In response to the decline of the yuan, the United States could impose new retaliatory measures on Beijing, which could respond by letting its currency fall further or by retaliating in turn. In response, the U.S. president could urge the Treasury to also intervene in the foreign exchange markets to weaken the dollar and boost the competitiveness of American exporters.
Collateral Victims
Such a maelstrom would force the other major central banks − starting with the European Central Bank − to intervene in turn to support their economies. It would unleash a storm on the currencies of emerging economies, the collateral victims of trade tensions.
The two countries might find common ground. However, the escalation over the last few days makes it seem unlikely. Beyond Trump's accusatory tweets and Beijing stating it was offended in response, the attitude of both sides gives rise to fears that neither one truly intends to reach an agreement in the near future. Already campaigning for the 2020 presidential election, Trump is betting that a hard-line stance concerning China will earn him points. In the U.S. administration, some are convinced that Chinese leader Xi Jinping’s inner circle is waiting for Trump to leave office to negotiate a more favorable agreement.
While the Communist regime knows that Trump’s attacks are chiefly aimed at ensuring his reelection, its position is more complex. In theory, it has enough ammunition to maintain a long trade and monetary front against the United States. In such a scenario, Europe would be the big loser. A Sino-U.S. struggle for a weaker dollar and yuan would automatically push up the euro, hitting the continent’s industrial exports, which have already been penalized by the German automotive crisis. It wouldn’t take much, then, for Europe to plunge back into a recession.
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