Currency War or Trade War? Two-Edged Dilemma for US and China

Before addressing the question, let’s take a the US quarterly goods trade deficit with China.

Net Goods Trade with China Quarterly

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Trade Deficit Timeline

• The US trade deficit with China blasted higher starting in 2004.
• Despite a 26% appreciation in the yuan (Renminbi) starting 2005, the US trade deficit blast continued.
• From 2015 until the second quarter of 2018, the trade deficit with China shrank.
• From the moment Trump launched tariffs in July of 2018, the trade deficit shrinkage reversed.

Trade War Timeline

China Briefing has a Trade War Timeline.

It pegs the start as July 6, 2018. That’s when Trump first announced tariffs on China.

I would place the date at March 2, 2018. That’s when Trump made this inane Tweet.

twitter.com/realDonaldTrump/status/969525362580484098

Ka- Blam

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Trump’s Dilemma

1. Trade wars are not easy to win or the US would have won already.
2. Soybean exports to China have collapsed. Trump even begged China, Please Shift Soybean Tariffs to Something Else. China agreed to shift tariffs, but that agreement collapsed in the more recent escalation.
3. In trade hardball, China Threatens to Cut Off US Supply of Rare Earth Elements. Many dismiss this threat because rare earths are not that rare. That’s a true statement, but this is not about the long term, it’s about the short term.
4. Trump’s Trade Lies So Preposterous No One Can Seriously Believe them.
5. Tariffs rate to strengthen the US dollar, the last thing Trump wants.
6. Trump has an election to win, China doesn’t.

China’s Dilemma

1. China would love for the yuan to sink to counteract Trump’s tariffs except for one thing: China needs those reserves to stop capital flight.
2. Whereas the Fed bailed out (recapitalized) US banks over time by paying interest on excess reserves, Chinese banks and State-Owened Enterprises (SOEs) are in as bad a shape as ever.

Predicting a Loser

It does not matter whether one labels this a currency war or a trade war.

Predicting a loser in is easy: both sides.

China’s retaliatory tariffs on agricultural goods hurts the Chinese.

Trump has more tariffs to place simply because of the trade deficit. However, placing tariffs hurts US consumers and importers.

The steel and aluminum tariffs are particularly onerous on US businesses that use steel and aluminum.

Curious Irony

I have seen the claim many times recently that the US will win the trade war because it can impose more tariffs on China than vice versa because of the trade deficit.

Please understand the inherent irony: The more tariffs one places, the bigger the losses.

Trump is thus in a position to damage the US far more than China can retaliate the foolishness.

Bottom Line

It’s far too late to reverse this nonsense. A global recession looms.

Mike “Mish” Shedlock