The Corner

Economy & Business

The Trade War’s Shifting Ground

The United States and China have announced new tariffs on one another as part of their ongoing trade war.

Funny thing about trade wars: The rationale has a way of changing when convenient.

For years, the anti-trade lobby argued that China was unfairly competing with the United States through “currency manipulation.” (It’s “currency manipulation” when the other guy does it; when your guys do it, it’s “monetary policy.”) The charge was echoed on the campaign trail by Donald Trump, who vowed to label China a currency manipulator, a position he abandoned in April of 2017.

Currency manipulation, or monetary policy, can be a tightrope walk. China and other countries heavily dependent on exports have incentives to devalue their currencies, making their exports cheaper for overseas buyers. But devaluing the currency also artificially lowers the standard of living at home by diminishing domestic buying power, which becomes more important as the growing sophistication of economies such as China’s mean more trade, including importing components and raw materials for export-oriented manufacturers. China is hardly alone on that front: In the wake of the 2008-09 financial crisis, the Swiss franc appreciated so much that it began to hurt Swiss exports. (Even Rolex buyers are price sensitive, and Switzerland’s pharmaceutical exports are three times the value of the exports of its famous timepieces.) The Swiss took extraordinary measures to halt the rising valuation of their currency, including the imposition of “negative interest rates” on foreign holders of Swiss francs in Swiss accounts. (Rather than earning interest on the cash in their accounts, the holders were charged 0.25 percent interest for the privilege of holding Swiss francs.) The rising Swiss franc was hard on exports, and it was also hard on tourism, which is a big business in Switzerland.

There is no escaping the law of unintended consequences, and while China had been working to increase the value of its currency in the lead-up to the trade war, U.S. tariffs, and the promise of an extended confrontation with the United States over trade matters, has resulted in weakening the yuan, which makes Chinese exports even more attractive on world markets. Beijing has taken some unusual steps to try to boost the yuan’s value, including the use of foreign-exchange swaps.

Those in the United States hostile to Chinese trade spent years complaining about Beijing adopting policies that would devalue the yuan. And now that they have an administration that shares their concerns, the U.S. government is implementing policies that devalue the yuan, while Beijing is doing the opposite of what generated those “currency manipulation” complaints in the first place.

It’s a funny old world.


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