WASHINGTON – Donald Trump sold himself as an expert deal-maker. At the top of his list was a promised trade bargain with China. It isn’t working as planned. The trade war with China is a dangerous economic battle.
What triggered the latest confrontation was Trump’s recent decision to slap a 10% tariff on roughly $300 billion of Chinese exports to the United States; earlier moves imposed a 25% tariff on $250 billion of Chinese exports.
Trump’s actions reflected his frustration with China’s unwillingness to overhaul its trade policies. Instead, according to U.S. officials, China refused to buy more U.S. farm goods. American negotiators have also pushed China to stop forcing U.S. firms to relinquish their latest technologies as the cost of investing.
China retaliated by having its central bank devalue the country’s currency, the renminbi (RMB). The bank had been defending the currency at 6.9 RMB to the dollar; it moved its target to 7 RMB. A cheaper currency would boost China’s exports, offsetting some of the effects of Trump’s tariffs. The administration reacted by declaring China a “currency manipulator.”
Just what happens now is anyone’s guess. Start with China’s decision to let the RMB go to 7 to the dollar. Ordinarily, this would have been an economic hiccup. Now it’s been invested with enormous political significance. Economist Eswar Prasad of Cornell University, a China expert, puts it this way:
“[The RMB depreciation] is a clear signal from the Chinese authorities that, from here on, all available covert and overt economic and trade actions are on the table as retaliation against U.S. trade hostilities.”
Or take the U.S. decision to label China a “currency manipulator.” This sounds tough. It isn’t. Once the United States labels a country a “manipulator,” it must open negotiations with the offending nation. But we’ve already been negotiating unsuccessfully for years with China, notes economist C. Fred Bergsten of the Peterson Institute. More negotiations don’t look promising.
In the past, China manipulated the RMB. The depreciation gave Chinese exporters an advantage and made imports into China more expensive. But now, say Bergsten and other economists, China has stopped using these practices and no longer meets the Treasury Department’s criteria for manipulation.
The U.S. law defining currency manipulation sets three tests: First, a significant bilateral trade surplus with the United States. China meets this. But it no longer meets the second test, which is persistent intervention in foreign exchange markets, or the third test, which is a large current account surplus with the rest of the world.
Despite this, Bergsten thinks Trump might use the stigma of being cast as a “currency manipulator” to take further action against China. In the past, he has mentioned imposing a 25% tariff on imported vehicles. Another possibility would be raising existing tariffs from 25% to much higher levels.
The central question now is whether we are stumbling toward a larger crisis. There are several possibilities.
One is that the gradual slowing of economic growth in Europe, China and the United States makes it harder for borrowers to service their loans. A related danger is massive capital flight from so-called “emerging market” countries (such China, India and Brazil), as investors move their funds into safe havens. This, too, would tighten credit.
For the moment, most economists seem to be discounting a devastating crisis. Higher tariffs mean higher prices. They discourage spending and growth, but the amounts affected are modest compared to the size of the U.S. or Chinese economies. Remember that the U.S. economy is roughly $20 trillion.
What could change the outlook is the impact of the U.S.-China conflict on consumer and business confidence. If people suddenly become more uncertain about the future, the impact on spending could be much larger.
Meanwhile, Trump’s self-declared reputation as a great deal-maker is in shambles. It will be hard to make that claim again.
Robert Samuelson is a columnist for The Washington Post.