Will Trump’s trade war precipitate a currency war?
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 US has been actually implemented, plus another $2-$3 billion in intermediate steel and aluminium products.
In response, China has so far imposed an equivalent $36 billion in tariffs on imported US agricultural goods, targeting US soyabeans, port, cotton and other grains produced in Trump’s political base of the US 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 US. But to date there’s only been US tariffs implemented on Europe steel and aluminium imports.
And the response from Europe has been a mere $3 billion in counter-tariffs on US imports.
Ditto for trade with Mexico-Canada. US steel-aluminium tariffs on imports from Mexico-Canada have elicited a token response of $15.8 billion in Mexican and Canadian tariffs on US imports.
Total actually implemented US 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 US annually.
US trading partners have responded measuredly in kind, with their own 2,3 percent in tariffs on US exports on the total $2,58 trillion US 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 US 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 try 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 US 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 or the current US-China tariff spat descending into a currency war.
A Trump two track trade policy has been underway since early 2018. One track is with US 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 benefiting his domestic US political base and confirming his US “economic nationalism” policy that proved so politically valuable to him in the 2016 elections. Much of the trade war with allies is really about US domestic politics and the upcoming US November midterm elections.
US-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 signalling 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 this past week to explore concessions with Trump. A deal was negotiated last spring by US and Mexican trade representatives, but was subsequently scuttled by Trump. Trump introduced a new demand in US-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 US 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 US and Mexican positions in negotiations 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 US midterm elections — a deal with Mexico (and thereafter similarly with Canada) will be concluded quickly. And according to US Commerce Secretary, Wilbur Ross, just last week, an agreement between the US 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 this past week. Juncker’s goal was to get Trump to back off 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, US 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 US soybeans and US 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 US 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 US on Europe and a similar amount of token tariffs implemented by Europe on select US imports to Europe.