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I’ll See Your Tariff Increase, and Raise You 10% with a Cheaper Currency!

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“There’s more than one way to skin a cat.” As a long-time cat owner (one lived 13 years and the other 16 years), that’s not my favorite expression, but I’ll grant it’s true enough. It leads directly to the idea that, “There’s more than one way to win a trade war.”

Typically, trade wars are defined as tariff-for-tariff. The country that begins the trade war (say, the U.S.) imposes tariffs on its adversary (say, China). At that point, China has two options. It can cave, negotiate, make concessions and get the original tariffs removed.

Or, China can impose its own tariffs in retaliation on the U.S., and the trade war can escalate from there. At least so far, the escalatory path is being pursued by both sides. China’s problem is that it will soon run out of U.S. imports to tariff. China has a several hundred billion dollar per year trade surplus with the U.S.

Even if China tariffed every good purchased from the U.S., it would run out of items to tariff long before the U.S. does. As President Trump accurately forecasted, the U.S. has to win the trade war with China because “we already lost.”

Yet, the twenty-first-century trade chessboard is considerably more complex than the late twentieth-century version. The trade wars began in 2018, but the currency wars have been going strong since 2010. If China is running out of scope on tariffs of U.S. goods (it is), China can turn to extreme currency devaluation as another way to retaliate.

This article reports that China has already allowed the yuan to devalue against the U.S. dollar almost 10% in recent months and some analyses expect a further 10% devaluation between now and the end of the year. The U.S. can complain all it wants about “currency manipulation” (and may do so formally in October), but having launched a trade war, the U.S. is in no position to complain about currency war retaliation.

Observers can discuss posturing, negotiation and compromise all they want. The truth is that trade war and currency war vectors have now converged and U.S.-China relations will get a lot worse before they get better.

Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

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