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


Does China (Trump) want to fight a trade war or a currency war?

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.

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

Comments (19)
No. 1-10

Total war. Google it Mish. There is no such thing as a half ax war.


US rapidly becoming a 3rd world banana republic with many of it's major cities looking like post apocalyptic zombie hell holes,without reindustrialization entire west coast will resemble something from the Postman within the next decade!


Thanks for the blog! Could you help me understand a minor point. On China's Dilemma Point 1, you say "China needs those reserves to stop capital flight." I understand how weaker currency would lead to capital flight, but what reserves are you talking about? Wouldn't the yuan depreciating lead to MORE dollar reserves? Thanks!


You can't treat currency and trade as 2 separate things. China's main trade weapon historically has been devaluing Yuan vs USD.


Daniel Lacalle: "Shortly before the US launched its set of tariffs, the Chinese government accelerated two dangerous policies that we cannot ignore: intensifying capital controls , limiting the outflow of dollars from the country, and increasing the list of banned companies and sites, two measures that proved that the Chinese government was unlikely to open its economy, rather the opposite. These measures intensified in the last year and a half."

Zero Hedge "Much More Than a Trade War"

What is the bigger picture?


"China (or any other government) cannot extricate itself from the dollar. And even if it could, it would not affect the interest rate but the price of whatever currency China would buy. This would not alter the fact that the other paper currencies are farther along the trajectory into the black hole of zero."


Lets be clear:

Corporate America wishes to partially replace corporate income tax with consumption taxes... a la the 5%GST in Canada or the 16% IVA in Mexico.

Value added tax on domestic (American) producers is not popular but tariffs on imports fills the bill... it supports prices for domestic industries (another perk for the 10%) and is paid for by the great unwashed consumer (not as is claimed by China or Mexico or whoever).

ergo... there will be more foreign goods subject to tariffs... not less. The "trade war" narrative is the cover story for shifting the tax burden down the economic pyramid. Wealth will gush up and even less will trickle down.



"I understand how a weaker currency would lead to capital flight, but what reserves are you talking about? Wouldn't a yuan depreciation lead to MORE dollar reserves? Thanks!"

When China had periods of capital flight - it sold dollar reserves to buy yuan (to strengthen the yuan)

China does not want a strong yuan, but it does not want capital flight either. If China devalued the yuan, it would lead to currency speculation and capital flight. It wants the yuan to sink slowly.


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