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The Currency Wars and Trade Wars Are Merging Into One Big Fiasco

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I’ve written for a while about how trade wars follow currency wars as night follows day.

Both types of economic competition arise in a condition where there is weak growth and excessive debt. The economy does not grow fast enough to service the debt, so countries are forced into more debt. They try to increase growth by stealing from their trading partners with a currency devaluation. This can provide a short-term benefit (higher exports, reduced imports, imported inflation), but it doesn’t last, because trading partners retaliate by devaluating their own currencies.

This can go back and forth for years with no one getting ahead and the whole world worse off because of the costs and uncertainties of continual instability in the foreign exchange markets. After some years, countries resort to trade wars by imposing tariffs and penalties on imports from other countries.

The goal of increasing growth is the same as the currency wars, and the result is the same. It fails because of retaliation by trading partners. In the end, the global trading system is layered with tariffs and world trade contracts with no one better off. Meanwhile, the debt keeps piling up and the world moves close to a shooting war, a financial crisis or both.

This article reveals that currency wars and trade wars do not proceed sequentially; they actually exist side by side and quickly become entangled with each other. As Trump escalated tariffs on China, the Chinese ran out of headroom to impose more tariffs on the U.S.

The Chinese simply did not import enough from the U.S. to match Trump dollar for dollar. Instead, they devalued their currency to lower their unit labor costs to offset the higher costs of the tariffs. This could lead Trump to declare China a “currency manipulator,” with separate sanctions for that.

The Chinese currency devaluation is a likely cause of U.S. stock market volatility today as it was in August 2015 and January 2016. Expect the trade and currency wars to continue and get worse before the world’s two largest economies find a way out.

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