Last Saturday in this space I cited a Bloomberg headline noting that, in the week prior, U.S.-China trade tensions had morphed “from uncomfortable to scary.” In the week since we have proceeded at warp speed to a new risk threshold. Call this the shift “from scary to Strangelovian.”
Dr. Strangelove, of course, was the protagonist of Stanley Kubrick’s dark Cold War satire, How I Learned to Stop Worrying and Love the Bomb. In threatening this week to expand the trade war into a currency war, President Trump and Chinese leader Xi Jinping, too, are toying with weapons of mutual assured destruction.
Tensions ramped up on Monday, four days after Donald Trump took to Twitter to threaten a 10% tariff on an additional $300 billion of Chinese imports. Beijing struck back by ordering state-owned companies to suspend imports of US farm products, and allowing China’s currency, the renminbi, to sink below the psychologically significant level of 7 yuan-to-the-dollar. Trump responded by directing his treasury secretary, Steven Mnuchin, to formally declare China a “currency manipulator“—inviting a barrage of indignant criticism from Beijing.
On Thursday, the president took to Twitter to goad Federal Reserve chairman Jerome Powell into retaliating against China by weakening the dollar. “One would think that I would be thrilled with our very strong dollar. I am not!” Trump declared. “The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers” to compete.” Later the White House seemed to backpedal a bit and talk up the dollar.
But by Friday Trump was roiling markets again, this time by boasting that it would be “fine” with him if the next round of U.S.-China trade talks, scheduled for September, is cancelled.
What’s insane about all this is that further tariffs and especially competitive currency devaluations won’t benefit either economy. The risks for China, already suffering from its slowest growth in 27 years, are particularly acute. As the Financial Times explains here, a weaker yuan might help boost Chinese exports a tad by making them cheaper in dollar terms. But the downsides of devaluation are that it will: encourage capital flight (a huge problem in China); put more pressure on Chinese property developers and other companies struggling to repay dollar-denominated debts; and undo Beijing’s efforts to shift away from exports in favor of domestic consumption as the driver of economic growth.
And any benefit devaluation might confer to China’s exporters would be more than offset by the increased cost of Chinese imports, especially in the two biggest product categories: semiconductors and oil. China already is grappling with record high food prices driven in part by a raging epidemic of African swine flu.
Devaluing the dollar would increase prices for American consumers in much the same way. As former Treasury secretary Larry Summers observed in an interview on CNBC, “no nation can devalue its way to prosperity.”
Trump has famously declared that “trade wars are good and easy to win.” The reality is that trade wars, much like shooting wars, are dangerous and unpredictable—and in both the U.S. and China, the cost of allowing the conflict to escalate and expand will be disproportionately born by those who can least afford it.
Clay Chandler
– Clay.Chandler@fortune.com
– @ClayChandler
