Two Thoughts on Trade Wars and Currencies

I want to put out two brief specific thoughts about the what we attribute to the trade war and the value of the RMB.

Let us be cautious in what outcomes we attribute to the trade war.  Just about every headline, CEO, and asset manager is attributing outcomes to the trade war.  The reality is, very few of these outcomes should actually be attributed to the trade war.  Trade actions have broad and narrow impacts.  In reality, the impacts to US industry are targeted into relatively narrow industries.  In other words, if the US places tariffs on Chinese goods all consumers or businesses will pay in direct and indirect spillover costs a little bit more for those goods.  However, industries that cannot sell to China will be hard hit.

Almost everybody is blaming the trade war for problems.  When something as limited as the trade war is attributed to everything then it means nothing.  Let us remember right now in a nearly $20 trillion economy, tariffs have been placed on $50 billion worth of goods. Specific industries, firms, and workers will be hit.  Great skepticism should be attached to everyone wanting to claim harm from the trade war.

Every headline and CEO is rushing to blame the trade war when in reality, the real damage is much narrower.  The Qualcomm deal blocked by Beijing is a good example.  Beijing has a long history of tangling with Qualcomm over what it perceives as anti-competitive behavior.  Without casting judgement here, Qualcomm then asked Beijing to swallow another $45 billion acquisition.  Most headlines have touted that this deal was killed because of Trump’s trade war. Possible? Sure because Beijing has not issued an analysis saying why.  Much more likely, Beijing was concerned about Qualcomm getting that much bigger and that much more difficult to boss around. Coupled with Beijing’s declared Made in China 2025 and their buying every chip firm they can find right now which will not get blocked in Washington and it is easy to see why.

The other thing that we need to be careful in doing in talking about Chinese currency manipulation.  As I wrote in my recent Bloomberg Opinion piece, there is really almost no evidence that China is artificially pushing down the value of the RMB.  The USD is up strongly in 2018 against most currencies.  The RMB fall YTD is right in line with the various indexes, basic summary statistics of global currencies against the USD, and even relatively close to its CFETS predicted value.  What is notable this year is the strength of the USD.  Theoretically, the value of the RMB is set by a basket of currencies. Beijing clearly shifts that value around to its liking so it is not mechanistic but while it may deviate for a period of time, it will return to its predicted value.

Beijing clearly has a long history of manipulating its currency.  Upon this there is no question.  However, when the RMB is falling in line with most other currencies and its basket, we need much stronger evidence before having good reason to believe Beijing is manipulating.  I will be the first to criticize Beijing, but just saying the RMB is down YTD less than various USD indexes are up is not convincing me Beijing is manipulating the currency down.

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