The U.S. government has determined that China is manipulating its currency. It will engage with the International Monetary Fund to try to eliminate this unfair form of competition. If there is no progress within a year, China could face sanctions including its firms being prohibited from competition for U.S. government contracts.
Treasury Secretary Steven Mnuchin made the announcement today. Stock prices fell dramatically, with the Dow Jones average shedding more than 750 points.
China’s latest manipulation of its currency appears to be an attempt to offset the impact of the increased tariffs the U.S. has imposed on its goods. It can be viewed as an escalation of the trade war. Trump’s declaration that China is a currency manipulator certainly amounts to an escalation, though a justified one in my opinion.
In thinking about the trade war, it’s important to recognize two imbalances. One favors the U.S., the other favors China.
First, the U.S. has more ability to inflict pain on the Chinese economy than China has to inflict pain on ours. But second, the Chinese regime has more ability to absorb pain than does the Trump administration.
President Trump must face the electorate next year. The Chinese regime faces no such deadline.
Eventually, the regime will have to answer for poor economic performance. But by that time, Trump very likely will be out of office. Indeed, China is probably willing to gamble that, through a trade war, it can hasten the end of the Trump administration, and then end the war on terms favorable to Beijing during a Democratic administration.
In this connection, Morgan Stanley is predicting that if the trade war escalates, the world will plunge into a global recession well before the 2020 election. Specifically, it expects that if the U.S. raises tariffs to 25 percent on all imports from China for four to six months, a global recession will come in about nine months.
I don’t how reliable this forecast is, what the likelihood is that tariffs will be raised to 25 percent on all imports, or how severe the impact of a global recession would be on the U.S. economy. But even without 25 percent tariffs and a global recession, stock prices might well plummet. Hari Hariharan, chief executive officer of NWI Management says that if the current animosity between Washington and Beijing continues, U.S. stocks could slide by another 8 percent.
It seems, then, that Trump, although thoroughly justified in his moves against China, is playing with political fire.
I had thought that Trump might reach a face-saving deal with China well in advance of the 2020 elections. But now I wonder what incentive China has to help Trump save face or, indeed, to reach any kind of a deal other than outright capitulation by the U.S.
By now, China’s key incentives seem to favor continuing or even escalating the trade war in the hope that the U.S. economy tanks and Joe Biden wins the 2020 election. If Biden is derailed in his attempt to capture the Democratic nomination, maybe these incentives become less strong. I expect, though, that the Chinese prefer any Democrat to Donald Trump.
A significant economic downturn would, I think, doom Trump’s reelection bid. I don’t know whether the trade war with China will produce such a downturn, but it certainly carries that risk.