Donald Trump has lashed out at China and the European Union for allegedly “manipulating” their currencies against a bullish US Dollar. While the Yuan is down by 7.6% against the Dollar since the end of the first financial quarter of 2018, the Euro has been surprisingly stable but is nevertheless far below the highs of recent years.
When it comes to the Yuan’s downturn against the Dollar, Trump has thus far pointed all fingers at China.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?
— Donald J. Trump (@realDonaldTrump) July 20, 2018
In reality though, when it comes to the Yuan’s recent fall against the Dollar, Trump largely has himself to blame for creating an atmosphere of negative speculation against the Chinese economy due to his tariffs and threats of many more tariffs.
Ironically, this plays into China’s short term strategy as a de-valued Yuan will help China to equalise tariffs in its trade with the US thus making many of the new protectionist barriers essentially toothless against American businesses and consumers buying these “de-valued” goods with an increasingly strong Dollar. This is one of the reasons that China has not taken any drastic measures to strengthen its currency. China’s strong economic growth means that the domestic economy retains strength while a low Yuan caused more by Trump than anyone else, actually works to China’s favour in terms of exports - particularly where the large US market is concerned. Should China wish to sell off some of its holdings in US Treasury Debt, the current trend also bodes well for Shanghai. Finally, a weaker Yuan and stronger Dollar means that should Chinese holders of US assets including vast tracts of real property, decide to sell off their holdings, this would also be a good time to do so based on the current exchange rate. In this sense, Trump has actually expanded rather than limited China’s options in fighting a trade war with Washington.
While currently, the US has placed tariffs on $34 billion worth of Chinese goods while China has done the same in terms of retaliatory tariffs against Washington, Donald Trump has now vowed to place tariffs on all Chinese imports to the US, totalling just over $500 billion. As US stocks took a hit in the aftermath of the $500 billion threat while negative speculation against the Yuan was also fuelled, the US is now in a position where the threat, let alone the reality of of $500 billion ‘total tariff’ is actually causing more short term harm to the US than to China. While both the Chinese and US economies remain strong, a crash in the US stock market, especially at a time when interest rates have pushed the Dollar higher, could result in a dramatic change of fortune for the US if the current atmosphere of caution vis-a-vis China is not reversed from the American side.
Ultimately, the trade war with China could end up being a major losing endeavour for the US, assuming that Trump isn’t merely bluffing in order to facilitate further discussions on what he would consider an amicable trade agreement. Seeing as China is opening up its markets as part of a historic shift to diversify both inward capital investment and the inflow of new foreign goods, this would actually be the ideal time for Washington to cut the kind of deal with China that could end the atmosphere of hostility between China and the US. All the while, such a deal could put Trump in a position to compete with his hated European rivals to see who is more willing to cut a new trade deal with China that would allow foreign goods to more rapidly enter the Chinese market.
In this sense, rather than closing American doors to China at a time when China is inviting the world’s goods and capital into its substantial and expanding domestic market, Trump could opt for a strategy whereby new deals are cut allowing for the dropping of US tariffs on Chinese imports while garnering specific agreements from Beijing to allow more US goods than ever before to be sold on the Chinese market. The pot could always be sweetened by adding elements of cooperation in hi-tech research and development thus assuaging the “fake news” refrain from the US that somehow China is an intellectual property “thief” where in reality, China is fast becoming the world’s top innovator.
Such a move would be a big wake-up call to the EU which in spite of threatening to develop freer and more open bilateral trade with China, is once again dragging its feet due to an historic atmosphere of caution in Brussels when it comes to allowing Chinese goods into Europe.
Ultimately, which ever major western economic power is able to secure a favourable bilateral deal with China first will be the winner. While China would welcome a freer and more open arrangement with both Brussels and Washington, there are clear benefits to being the first to the finishing line. In this sense, instead of fighting a trade war on two major fronts with both China and EU, Trump ought to consider the possibility of making economic peace with China on the win-win model and thus challenge the EU to what ultimately would be a healthy competition to see who is the most willing and able to cut a deal with China which reflects the modern trends of geo-economic openness, cooperation and mutually beneficial results.
