Trade War for Real? Parts 2, 3

If Trump’s trade policy toward U.S. allies is “phony,” by seeking only token adjustments to trade relations, then the U.S. trade offensive targeting China is for real.

While Trump has repeatedly exempted U.S. allies from tariffs (steel and aluminum), pitched “softball” deals (South Korea), and tweeted repeatedly how well negotiations are going with NAFTA, in stark contrast to the actions and words of the U.S. toward China as trade negotiations in progress have been “hardball.”

Contrary to media hype, the Trump trade offensive targeting China is not a product of just the past few months. It did not arise in early March with an impulsive tweet by Trump or with his attention-getting declaration to impose tariffs on steel and aluminum producers worldwide. In part 1 of this series, “Trump’s Phony Trade War,” I noted that China accounted for less than a billion in U.S.-China steel and aluminum trade. China wasn’t even in the top 10 steel exporters to the U.S., and what it did export were mostly intermediate goods needed by U.S. producers. Nevertheless, tariffs on steel were left on China after Trump’s announcement of worldwide tariffs, even after he exempted just about all other countries, including the top 5 importers to the U.S.—Canada, Mexico, South Korea, Germany and Brazil (and Canada the top aluminum exporter). The U.S. trade offensive targeting China was set in motion at least a year ago, in spring 2017. It surfaced last August 2017.

The U.S. Plan to Target China

In August 2017, Trump formally gave the U.S. Office of Trade (OUST) the task of identifying how China was transferring U.S. technology, “undermining U.S. companies’ control over their technology in China,” as well as seeking to do so by acquiring U.S. companies in the U.S. (See the Presidential Memorandum for the United States Trade Representative.) On August 18, 2017, the OUST laid out in writing four charges in a formal investigation it was undertaking, accusing China of actions designed to “obtain cutting edge in IP (intellectual property) and generate technology transfer.” All four charges were intensely technology transfer related.

That August 2017 scope of investigation document and objectives was then reproduced verbatim, with expected recommendations, in the 58-page OUST report of March 22, 2018—not Trump tweets or the steel-aluminum tariffs—which publicly launched Trump’s trade offensive against China. The main theme of the report was that China was “guilty” of aggressively seeking technology transfer at the expense of U.S. corporations, both in China and the U.S.

Based on the OUST report, Trump announced plans to impose $50 billion in tariffs on 1,300 China general imports, ranging from chemicals to jet parts, industrial equipment, machinery, communication satellites, aircraft parts, medical equipment, trucks, and even helicopters, nuclear equipment, rifles, guns and artillery.  Trump may have appeared in March 2018 to have shifted gears in his trade policy—from a general, worldwide steel-aluminum tariffs focus to a focus targeting China trade—but China has been the planned primary target for at least the past year. Trump just set it in motion publicly on March 23. A confrontation with China over trade had been planned from the outset. A curious aspect of the U.S. preparation for targeting China is that only days before the OUST report release, Trump tweeted he’d like to see $1 billion in tariffs on China. How then did the official policy become $50 billion a few days later? Was Trump initially out of the loop of U.S. elite China trade policy in development?  Did the China-U.S. trade war even really originate with Trump? Or was it perhaps planned by others within the U.S. traditional elite, with Trump brought on board after seeing the domestic political possibilities for himself?

Trajectory of U.S.-China Trade Negotiations

But an announced plan to impose tariffs at some point in the future is not the same as the implementation of those tariffs. Despite Trump’s March announcement and declaration of $50 billion in tariffs on China goods imports, a delay of at least 60 days must take place before any further definition or actual implementation of the $50 billion by the U.S. can occur—thus giving ample time for unofficial pre-negotiations to occur between the countries’ trade missions. Technically, the U.S. could even wait for another six months before actually implementing any tariffs. To date there has been only talk and threat of tariffs—on China or on U.S. allies. With China, Trump has merely “notched an arrow” from his trade quiver. The bow hasn’t even been drawn, let alone the arrow let fly.

Following Trump’s threat of $50 billion in tariffs, China immediately sent its main trade negotiator, Liu, to Washington and assumed a cautious, almost conciliatory approach. China responded initially with a modest $3 billion in tariffs on U.S. exports. It also made it clear the $3 billion was in response to U.S. steel and aluminum tariffs, and not Trump’s $50 billion.  More action could follow, as it forewarned it was considering additional tariffs of 15 to 25 percent on U.S. products, especially agricultural, in response to Trump’s $50 billion announcement. China was waiting to see the details. At the same time it signaled it was willing to open China brokerages and insurance companies to western-U.S. 51 percent ownership (and 100 percent within 3 years), and that it would buy more semiconductor chips from the U.S. instead of Korea or Taiwan. It was all a token public response. China was keeping its arrows in its quiver.

Following Trump’s mid-March tariff tantrum, behind the scenes China and U.S. trade representatives continued to negotiate. By the end of March all that had still only occurred was Trump’s announcement of $50 billion of tariffs, without further details, and China’s $3 billion token response to prior U.S. steel-aluminum tariffs. From there, however, events began to deteriorate.

On April 3, 2018, Trump defined the $50 billion of tariffs—25 percent on a wide range of 1,300 of China’s consumer and industrial imports to the U.S. The arrow was being drawn. The list of tariffed items was the verbatim USTR Report’s “list.” Influential business groups in the U.S.—like the Business Roundtable, U.S. Chamber of Commerce, and National Association of Manufacturers—immediately criticized the move, calling for the U.S. instead to work with its allies to pressure China to reform.

China responded more aggressively as well, promising an equal tariff response, declaring it was not afraid of a trade war with the U.S. That was a welcoming invitation for a Trump tweet which followed, as Trump declared he believed the U.S. could not “lose a trade war” with China and maybe it wasn’t such a bad thing to have one. Trump tweeted further that maybe another $100 billion in U.S. tariffs might get China’s attention.

China then said it would raise 15-25 percent tariffs on the U.S. and responded to Trump’s $50 billion, identifying their own $50 billion tariffs on 128 U.S. exports targeting U.S. agricultural products and especially U.S. soybeans, but also cars, oil and chemicals, aircraft and industrial productions—the production of which is also heavily concentrated in the Midwest U.S. and thus Trump’s domestic political base. (Yuan Yang and Emily Feng, “China’s fighting talk on trade war with U.S. sends markets reeling,” Financial Times, April 5, 2018.)

This particular targeting clearly aggravated Trump, disrupting his plans to mobilize that base for domestic political purposes before the November elections. He angrily tweeted perhaps another $100 billion in China tariffs were called for. In response, China declared it was prepared to announce another $100 billion in tariffs as well.

Trump advisors, Larry Kudlow and Mnuchin, tried to clean up Trump’s remarks. Kudlow assured the stock markets, which plummeted with the developments, saying “These are just first proposals…I doubt that there will be any concrete actions for several months.” (Ed Crooks, ‘Washington and Beijing urged to bury hatchet,” Financial Times, April 5, 2018.)

In reply to Trump’s threat of another $100 billion, China Commerce Ministry spokesperson, Gao Feng, declared it would not hesitate to put in place “detailed countermeasures” that didn’t “exclude any options.” And China Foreign Ministry spokesperson, Geng Shuang, added in an official news briefing, “The United States with one hand wields the threat of sanctions, and at the same time says they are willing to talk. I’m not sure who the United States is putting on this act for…Under the current circumstances, both sides even more cannot have talks on these issues.” (Kevin Yao and Christian Shepherd, “China blames US for trade frictions, says negotiations currently impossible,” Reuters, April 9, 2018.)

But all this was still a war of words, not yet a bona fide trade war.

Through the remainder of April negotiations by second-tier trade representatives continued in the background. Meanwhile U.S. capitalists in the Business Roundtable and other prime U.S. corporate organizations added their input to the public commentary process on the Trump tariffs that will continue formally until May 22 at least. Most warned a trade war with China would be economically devastating for their business.

In the first week of May, the Trump trade team of Treasury Secretary Steve Mnuchin, U.S. trade representative Robert Lighthizer, Trump trade advisor Peter Navarro and White House director of Trump’s economic council, Larry Kudlow, headed off to Beijing for negotiations. The composition of the U.S. trade team was notable. It revealed deep splits within the U.S. elite, some reflecting Trump interests and others reflecting more traditional elite interests in finance and the Pentagon-War industries. While interests clearly overlapped, the splits reflected differing priorities in the China trade negotiations.

One of the first reports when the two trade teams met in Beijing was from Mnuchin, who reported the negotiations were going extremely well. Mnuchin of course knew that before he left for Beijing. China had already indicated it was going to approve 51 percent U.S. corporate ownership of China companies in March, and it further signaled it would approve 100 percent ownership within 3 more years. U.S. bankers have always wanted a deeper penetration of China and now they’ll have it. They didn’t even have to give up anything to get it. That doesn’t sound like a “trade war,” at least not yet. China was cleverly driving a wedge between the bankers-multinational corporations wanting more access to its markets and the Pentagon-War industries faction of the U.S. trade team that want a stop to technology transfer.

But if one were to believe the U.S. press, the U.S. negotiating team came back from Beijing empty-handed and a trade war was imminent. If that were true, there would be no reason for China’s chief negotiator, Liu, coming to Washington for further talks, which was quietly announced after the U.S. trade team returned. U.S.-China trade negotiations are thus continuing, notwithstanding Trump tweets and schizophrenic bombast: One day after the U.S. team’s return demanding China reduce its $337 billion deficit by $200 billion by 2020; another day calling China president, Xi Jinping, his “good friend.”

U.S.-China trade negotiations will almost certainly take months to conclude, if ever, certainly extending well beyond the November 2018 U.S. midterm elections. This delay will put pressure on Trump to quickly come to some kind of token agreements with NAFTA and other trade partner negotiations also underway. A NAFTA deal is likely within weeks. And it will look more like the South Korea “softball” trade deal negotiated by Trump a few months ago than not.

Early agreements before the end of this summer are necessary for Trump to tout his “economic nationalism” strategy and declare it is succeeding before the November elections. One can also expect more “off the wall” tweets by Trump designed to “sound tough” on China trade and negotiations in progress for the same domestic U.S. political purposes. But they will be more Trump hyperbole and bombast, designed for his domestic political base while his negotiators try to work out the China-U.S. trade changes. It’s unlikely Trump wants a China trade deal before the U.S. November elections. There’s more political traction for him to publicly bash China on trade up to the elections.


What the U.S. Wants from China Trade

What Trump wants from U.S. allies trade partners are token adjustments to current trade relations that he can then exaggerate and misrepresent to his domestic political base as evidence that his “economic nationalism” theme, raised during the 2016 U.S. elections, is still being pursued. The U.S. traditional elite will allow him to do that, but won’t permit a major disruption of U.S.-partner trade relations in general. That’s why NAFTA, and later trade negotiations with Europe, will look more like South Korea’s “softball” deal when concluded.

China, on the other hand, is another question. The issues are more strategic. U.S. elites—both the traditional and the Trump wing—want more from China than they want from other U.S. trade partners. With China, it’s not just a question of “token” changes that Trump might then hype and exaggerate for domestic political purposes.

Currently, the U.S. is pursuing a “dual track” trade offensive: seeking token concessions from allies that won’t upset the basic character of past trade relations but will allow Trump to exaggerate and misrepresent the changes for his domestic political purposes, proving to his base that he’s continuing to pursue his promised economic nationalism. The key to the first track is “token” adjustments to trade. But, in the second track, what the U.S. elite want from China is a fundamental change in U.S.-China trade relations.

U.S.-Trump trade objectives in its negotiations with China are threefold: first, to gain access for U.S. multinational companies into China markets, especially for U.S. banks and shadow banks (investment banks, hedge funds, equity firms, etc.), but also for U.S. auto companies, energy companies, and tech companies. Expanding U.S. foreign direct investment into other economies is always a main objective of U.S. trade negotiations everywhere. Despite all the talk about goods trade deficits, for the U.S. trade deals are always more about ensuring U.S. “money capital flows” from the U.S. into other economies, than they are about “goods flows” coming from other countries to the U.S. Access to markets means first and foremost access for U.S. finance capital.

The U.S. second objective is to obtain some visible concessions from China that reduce that country’s goods exports to the U.S., without China in turn reducing U.S. agricultural and energy related exports to China. (It’s almost never noted by the U.S. press that the U.S. runs a significant services trade surplus with China, and that it is mostly financial services. Nor is it ever identified how much of the goods [products] trade deficit with China is the result of U.S. companies located there exporting back to the U.S. semi-finished goods for final manufacture in the U.S.)

But the main and most strategic objective of the U.S. is to thwart China’s current rate of technology transfer from U.S. companies in China and from China companies acquiring U.S. companies in the U.S.

The key technology transfer categories are Artificial Intelligence software and hardware, next generation 5G wireless, and nextgen cyber-security software. The U.S. obfuscates the categories by calling it “intellectual property.” But it is the latest technology in these three areas that will spawn not only new industries, and whoever (U.S. or China) is “first to market” will dominate the industries and products for decades to come—but the technologies further represent the key to future military dominance as well as economic.

The U.S. is concerned that China may leapfrog into comparable military capability. Already virtually all the new patents being filed in these tech areas are by China and the U.S. The rest of the world is left far behind. China’s 2017 long term strategy document, “China 2025,” clearly lays out its planning for achieving dominance in these technologies over the coming decade. It has succeeded in getting the attention of the U.S. elite, both economic and military.

The U.S. defense sector—i.e. Lighthizer and Navarro—want to stop, or at least dramatically slow, China’s acquisitions of technology related U.S. companies. While tariffs are on paper only so far, the U.S. has been clearly targeting China companies hunting for U.S. acquisitions. Stopping deals with ZTE and Qualcomm acquisitions recently are but the first of more such U.S. actions to come. The U.S. financial-multinational corporation sector want more access to China markets are (ironically) authority to acquire China companies. Trump may want both of these, but even more so wants some kind of “win” trade deal he can boast to his base about. China will offer a deal conceding on the last two objectives, while holding out on the tech transfer issue.

The contradiction the U.S. faces in negotiations is thus internal. It is that the representatives of the U.S. elite cannot agree on what has the greatest priority for the changes they want from China. There are at least three U.S. diverging elite interests on the U.S. side, reflecting at least three major objectives sought by the U.S. That allows China to “play off” one sector of the U.S. elite against the other, giving it a long term advantage in negotiations with the U.S. on trade.

Should the U.S. elite settle for short term concessions from China—allowing for more U.S. financial firms access to China, more U.S. company ownership of Chinese companies, and/or moderate short term gains in China goods exports—but fail to slow China’s technology strategy, then it will represent another “defeat” for the U.S. in relation to China’s growing challenge to U.S. global economic-military dominance. It will represent another success for China, similar in strategic importance to its recent “One Belt-One Road” initiative, its launching of the Asian Infrastructure Investment Bank, the adoption of its currency by the IMF for world exchange, and its current development of an Asian common market filling the gap by the U.S. failure to establish its free trade Transpacific Partnership treaty. Technology parity by China with the U.S. may in fact have a greater impact on U.S. dominance than all the above in the long run.

But there’s more to U.S.-China trade than deficits, market access and even technology transfer. There are Trump’s domestic political objectives behind the China-U.S. trade dispute as well.  Trump’s political priority has two dimensions: one is to maximize the turnout of the Republican base in the upcoming midterm November 2018 elections. Trump cannot afford to lose either the House or the Senate, or his agenda on immigration, walls, and deportations is finished. Trump also needs to agitate and mobilize his domestic base as a counterweight to traditional U.S. elite resistance when he fires Mueller, the special counsel investigating his pre- and post-election relationships with Russian business oligarchs.

Thus multiple objectives are contending among and between the different factions behind the U.S.-China trade negotiations: technology transfer for the military hardliners, market access for the bankers and multinational corporations, and Trump getting relatively quick concessions he can sell to his “America First” economic nationalist domestic political base before November. Market access has already been conceded by China, so the alternatives are a trade war over technology transfer or some token adjustments to goods imports to the U.S. that Trump can “sell” to his base. If the latter, China-U.S. trade negotiations outcomes will look more like South Korea and NAFTA. If the U.S. insists on technology transfer, then arrows will be drawn and let fly.

Only then will it become clear that the current U.S.-China trade negotiations are the opening phase in a real trade war, or just another case example of Trump hyperbole for purposes of pandering to his domestic political base.


Will Trump’s Trade War Precipitate a Currency War? Part 3

In mid-July, Trump threatened $500 billion in tariffs on China imports, escalating his prior threat to impose $200 billion on China. He then threatened hundreds of billion in tariffs on world auto parts imports, targeting Europe. But Trump’s threats and announcements do not constitute a trade war. Threats and even announcements of tariffs are one thing; the actual implementation of tariffs another. But even the current scope of tariff implementations do not yet represent a trade war. Bona fide trade wars occur when tariff fights spill over to currency devaluations and generate currency wars.

To date, only $34 billion in tariffs on China industrial imports to the U.S. has been actually implemented, plus another $2-$3 billion in intermediate steel and aluminum products. In response, China has so far imposed an equivalent $36 billion in tariffs on imported U.S. agricultural goods, targeting U.S. soybeans, port, cotton and other grains produced in Trump’s political base of the U.S. Midwest agricultural belt.

Elsewhere around the globe, earlier in July Trump threatened to escalate a trade conflict with the European Union, threatening to impose $200 billion on Europe and global auto part imports to the U.S. But to date there’s only been U.S. tariffs implemented on Europe steel and aluminum imports. And the response from Europe has been a mere $3 billion in counter tariffs on U.S. imports. Ditto for trade with Mexico-Canada. U.S. steel-aluminum tariffs on imports from Mexico-Canada have elicited a token response of $15.8 billion in Mexican and Canadian tariffs on U.S. imports.


The total actually implemented U.S. import tariffs to date—mostly levied against China—amount to only $72 billion, or 2.3 percent of a total of $3.06 trillion imports into the U.S. annually. U.S. trading partners have responded measuredly in kind, with their own 2.3 percent in tariffs on U.S. exports on the total $2.58 trillion U.S. exports worldwide. Tariffs of 2.3 percent hardly represent a tariff war, let alone a trade war. Bona fide trade wars are never limited to tariffs. Trade wars involve not only tariffs but also non-tariff barriers to trade. Even more important, bona fide trade wars occur when tariff spats escalate and precipitate currency devaluations.

Should Trump follow through with threats of $200-$500 billion more tariffs on China imports, the U.S. and China will likely slip into a currency war as China allows its currency, the Yuan, to devalue further. And that devaluation will almost certainly quickly go global—given the current significant decline in currency exchange rates already taking place throughout various throughout key emerging market economies (Argentina, Turkey, India, etc.). Other emerging market economies will have no choice but to follow China’s devaluation lead. Nor will advanced economies like Japan and Europe be immune from having to devalue, as they to offset Trump tariffs in order to maintain their share of global trade that Trump policies are clearly attacking.


Trump’s Dual Track Trade War 

Trump apparently believes he can control the response of U.S. trading partners to his threats and intimidations, and that he can conclude token trade deals, if necessary, to avoid falling over the trade cliff of currency devaluations. While he might be able to backtrack and quickly close trade deals with NAFTA partners and Europe—just as he settled a quick, token deal with South Korea early this year—the settling of a quick trade deal with China may not prove so easy. And the longer the tariff conflict with China continues, and escalates, as appears likely, the greater the likelihood of the current U.S.-China tariff spat descending into a currency war.

A Trump two track trade policy has been underway since early 2018.  One track is with U.S. trading allies. Here Trump will prove flexible and eventually settle for minor adjustments in trade terms, just as he did with the South Korea trade pact earlier this year. Trump will then exaggerate and misrepresent the dimensions of the deals with allies, selling it all as great achievements benefitting his domestic U.S. political base and confirming his U.S. economic nationalism policy that proved so politically valuable to him in the 2016 elections. Much of the trade war with allies is really about U.S. domestic politics and the upcoming U.S. November mid-term elections.


U.S.-Mexico Deal Imminent

Unlike China, where trade negotiations are currently frozen and no discussions are underway, both Europe and Mexico in recent weeks have been signaling they are amenable to a quick deal with Trump if he will settle for relatively minor concessions. Mexico president elect, Lopez Obrador, sent his trade negotiator to Washington DC to explore concessions with Trump. A deal was negotiated last spring by U.S. and Mexican trade representatives but was subsequently scuttled by Trump. Trump introduced a new demand in U.S.-Mexico negotiations that any trade deal would have to “sunset” and be renegotiated every five years. Trump did not want a deal too early. Trump wants a deal closer to the U.S. November elections so that he can tout it to his domestic political base as proof his “economic nationalism” policy works. The current differences between the U.S. and Mexican positions in negotiations currently are otherwise not significant; should Trump drop his sunset demand, which he will do when the timing for his domestic politics is appropriate—that is, just before or soon after the U.S. mid-term elections—a deal with Mexico (and thereafter similarly with Canada) will be concluded quickly. And according to U.S. Commerce Secretary Wilbur Ross, an agreement between the U.S. and Mexico will soon be announced.

Hiatus in Trump “War of Words” with Europe 

The same Trump flexible approach was evident in the just-announced “deal” with European Commission president Jean-Claude Juncker, who also came to Washington. Juncker’s goal was to get Trump to back off on his threats to impose tariffs on Europe auto part imports. Not actual tariffs, in other words, but to get Trump to retract his threat to perhaps introduce them. Trump and Juncker then announced a “deal.” The so-called deal is merely verbal and indicate objectives the parties, U.S. and Europe, hope to maybe achieve at some point undefined in the future. It was not actually a trade agreement. Just a mutual statement they would negotiate toward a deal. Trump backtracked from his threat to impose tariffs on autos. In exchange, Juncker offered to buy more U.S. soybeans and U.S. natural gas at some point in the future. In terms of actual tariffs, or any other “trade” measure, the Trump-Juncker announcement was mostly a public relations stunt for both parties designed to placate their domestic critics.

The U.S. trade war with Europe is just a war of words, as it has been thus far with NAFTA.  What exists in fact is just a couple billion dollars of actual tariffs on steel and aluminum imposed by the U.S. on Europe and a similar amount of token tariffs implemented by Europe on select U.S. imports to Europe. The so-called trade war with NAFTA and Europe is still phony. Not so the case, however, with China.  And while negotiations continue with NAFTA and Europe, no further discussions are underway with China and will likely not occur soon.

What the U.S. Wants from China—And Won’t Get

Unlike NAFTA and Europe, a quick settlement with China is not in the works. The U.S. wants concessions in three areas from China: more access to China markets by U.S. banks and multinational corporations, including 51 percent and then 100 percent U.S. corporate ownership of their operations there. Second, the U.S. wants China to purchase at least $100 billion more in U.S. goods, mostly from Midwest U.S. agribusiness and manufacturing. Third, it is demanding stringent limits and reductions in China’s current policy requiring U.S. nextgen technology transfer from U.S. businesses operating in China. What has the U.S. defense and intelligence establishment especially worried is China plans to leapfrog the U.S. in nextgen technologies like 5G wireless, Artificial Intelligence, and Cybersecurity. These represent not only the source of industries of the future, but threaten a quantum leap in China military capabilities. The U.S. refers to the nextgen technologies as “intellectual property” since they are fundamentally software based. But what the U.S. really means is nextgen military-capable software intellectual property.

When negotiations opened with China this past spring, China cleverly offered major concessions to the U.S. It announced it would grant 51 percent ownership rights for U.S. multinational corporations doing business in China, and signaled it could agree to 100 percent as well. That delighted U.S. bankers and multinational corporations. Their representative on the U.S. trade negotiating team, U.S. Treasury Secretary Steve Mnuchin, publicly declared a deal with China was therefore imminent. China also signaled it could purchase $100 billion more a year in U.S. agricultural products. But it would not budge on the tech transfer issue. A deal was close but was then upended by U.S. defense-intelligence-war industries’ U.S. negotiating faction. Through their friends in Congress, they aborted any prospective trade deal with China. Trump then followed up by threatening to impose an additional $200 billion of tariffs on China in response to China matching U.S. tariffs on China imports by implementing an equivalent $34 billion on U.S. exports to China, especially targeting U.S. soybeans, pork and other grains. And when China declared it would match the U.S. threat of another $200 billion in tariffs, Trump doubled down by threatening a further $500 billion on China imports. While Trump’s threats of more tariffs and intimidation tactics have proven to successfully elicit the response he wants from Europe and NAFTA partners, it has not proved similarly effective with China. Nor will it likely.

While China will allow significant U.S. corporate access to its markets, and will agree to purchase hundreds of billions more of U.S. exports, especially agricultural, China shows no signs of bending on its technology development objectives. And while U.S. bankers, multinational corporations, and agribusiness-farmers appear willing to cut a trade deal on market access and U.S. exports purchases, it appears that the U.S. defense establishment (Pentagon, Intelligence agencies, defense contractors), together with its friends in Congress, will not allow a deal with China without major concessions by China on technology.


From Tariff Spats to Currency Wars


The longer the tariff spat with China drags on, and deteriorates, the more likely a U.S.-China tariff war will escalate into a bona fide trade war involving currencies and U.S. dollar-Yuan exchange rates. And that is the prospect U.S. and global business interests are particularly worried about.

A currency war between the U.S. and China will reverberate across the global economy that already shows signs of slowing and, in some key sectors, is already descending into recession. Tariff spats involve two trading partners and may affect their mutual economies, but currency wars quickly spread across all economies in a chain-like contagion of devaluations.

This potential scenario is approaching, as Europe’s economy is slowing rapidly and tending toward stagnation once again. Japan is already in another recession. A growing number of emerging market economies are contracting—the worst case scenarios being Argentina, now in a 5.8 percent economic contraction, but Brazil, South Africa, and others are continuing to slip deeper into recession. Turkey’s currency is now collapsing rapidly, a harbinger of real economic contraction on the near horizon. Meanwhile, India and other south Asian currencies and economies are also growing more unstable. In short, the global economy is growing more fragile in terms of both trade and production. A trade war involving currency instability between China and U.S. will almost certainly tip the balance.

But Trump clearly believes China’s economy can be destabilized by the U.S. trade offensive and that China has more to lose than the U.S., since it has benefitted from U.S. trade more than the U.S. has from China trade. But this is a naïve and simplistic analysis, typical of Trump and his advisors. Typical of a financial speculator mentality, Trump believes that so long as the U.S. stock markets are doing well, the real economy is strong and can weather an intensification of a tariff war. For Trump, “tariffs are great.” Just raise them further to intimidate trading partners and force concessions from them to the benefit of U.S. corporate interests and the economies of his domestic political U.S. base.

China has already begun to “dig in,” however, in anticipation of a longer, protracted contest with the U.S. over tariffs and their economics effects, and U.S. demands to restrict China technology development. It has just announced another major fiscal-monetary stimulus to its economy in anticipation of slower growth from exports and trade with the U.S. A massive money injection to spur bank lending, tax cuts, and more government investment are planned to offset any export slowdown. It is also aggressively pursuing other trade deals with Europe and other economies to offset any decline in U.S. trade. China also has various measures it can employ in a Trump trade war escalation. It can slow its purchase of U.S. Treasury bonds. It can impose more non-tariff administrative barriers on U.S. companies in China and those exporting to China. It can launch a boycott of U.S. made goods among China consumers. These are likely measures of last resort, however. More likely is China may allow its currency, the Yuan, to devalue against the dollar—thus even offsetting any Trump tariff effects.  And somewhat ironically, the devaluation of China’s currency will be allowed to occur due to market forces, not any China official declaration of devaluation, since the U.S. policy is already causing a devaluation of the Yuan.

Trump’s trillion dollar annual U.S. budget deficits have resulted in the U.S. Federal Reserve central bank raising interest rates. The Fed must raise rates to finance Trump’s now estimated annual trillion dollar deficits for the next decade (caused by Trump’s $3 trillion in tax cuts and trillion dollar hikes in defense spending; with trillions more tax cuts and defense spending in the Congressional pipeline before year end 2018).

To pay for the multi-trillion dollar deficits, the Fed is rapidly raising interest rates. Rising interest rates are driving up the value of the U.S. dollar. That dollar appreciation in turn is causing an inverse decline in the value of emerging market economy currencies—and that includes China’s Yuan currency. The Yuan has devalued by 10 percent since the U.S. tax cuts, deficits, and interest rate hikes in 2018. A seven percent Yuan devaluation in just the last three months.  The Yuan is now at the edge of its trading band at 6.8 to the dollar. Should it slip further, which is inevitable as U.S. interest rates and the dollar continue to rise, a devaluing Yuan will set off a chain reaction of devaluations throughout the global economy—i.e. a currency war will have arrived. And as currencies devalue, Trump’s tariffs will have been offset, neutralized, negated. Trump is betting his intimidation approach can produce quick results before his tariff war precipitates a currency war and a severe global economic contraction. He is rolling the economic dice. He and his advisors clearly believe if it gets too serious, he can call off the tariff disputes with NAFTA, Europe and other trading allies quickly. He probably can, by backing off and getting token agreements which he’ll misrepresent and exaggerate. But the scenario for a quick resolution is quite different with China.

Some Conclusions

Thus far, Trump’s trade wars with allies are phony. A NAFTA deal is imminent. A hiatus even in the trade war of words with Europe has been declared. And a further escalation with China has not yet occurred. Trump will announce token and fake deals with Mexico and Canada before the U.S. November elections for purposes of touting the success of his “economic nationalism” to his U.S. domestic political base.  He will likely make more outrageous threats to China while perhaps trying to lure them back to negotiations with sweet-talk about China President, Xi, and possibilities of a deal. But China knows his game by now, and most likely will not negotiate until it sees what happens with the U.S. November elections and the Mueller investigation of Trump.

At some point China and the U.S. will negotiate. When they do, the key to whether a real trade war emerges thereafter will depend whether Trump follows through with his threats to impose another $200 billion in tariffs on China imports to the U.S. and whether the Pentagon and U.S. defense industry lobby agrees to soften its demands on U.S. technology transfer. U.S.-China negotiations have already reached tacit agreement on China purchases of U.S. exports and more U.S. banker-corporate access to China markets in the future. How China will respond to more U.S. tariffs and technology transfer is the crux of any U.S.-China trade agreement—or trade war.

Trump and his advisors believe China cannot match tit-for-tat an equal $200 billion since it doesn’t import that magnitude of goods from the U.S. They think therefore they have the advantage in a dispute with China. The U.S. has a bigger “tariff stick” than China has, is the thinking. But that view is naïve. China has other measures, which it has signaled it is prepared to employ (without yet revealing the details). A devaluation of its currency would be high on its agenda of possible responses should Trump implement $200 billion more in tariffs. China’s currency is already pushing the edge of its band, at 6.8 to 6.9 to the dollar. China thus far has been intervening in money markets to keep it there. All it needs to do, however, is stop intervening and let the Yuan devalue beyond the band, driven by market forces. It doesn’t even need to declare a devaluation. As the dollar rises, as it will continue to do so as the Fed raises interest rates further, the Yuan will devalue without China intervening to prevent it. (In other words, U.S. policy is ultimately driving the Yuan devaluation). A Yuan devaluation will allow China to offset Trump tariff costs by an equivalent amount, thus negating Trump’s tariff actions. Contrary to Trump’s bombast of Tariffs Are Great, he will find that tariff wars typically fail.

At that point the skirmish on tariffs between the U.S. and China will morph into a currency war and signal that a true trade war will have begun. It will be a China-U.S. trade war—with significant repercussions for other global currencies as a contagion effect of currency devaluations follow. Global currency exchange rates will adjust downward even lower than they have to date already throughout emerging markets, as well as in Europe and Japan. The general competitive devaluations will sharply slow global trade and, in turn, global economic growth


Dr. Jack Rasmus is the author of the book, Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression, Clarity Press, August 2017, and the forthcoming, The Scourge of Neoliberalism: US Policy from Reagan to Trump, also by Clarity Press. He blogs at and tweets @drjackrasmus.