Trade War With China Morphs Into Currency War: Biggest Loser is the EU

Those who think "trade wars are good and easy to win" need to stop and reflect on currency wars.

Trade Wars Easy to Win

Trump's "logic" rests on the notion that China has a huge trade surplus and the US can hurt China more than China can hurt the US.

Such logic is seriously misguided.

  1. Trade is not a zero sum game. One does not gain by losing less. Losing is losing.
  2. Yes, Trump is correct that the US can place more tariffs on Chinese goods than China can place on US goods. However, Trump cannot ignore US farmers, but the unelected leaders in China can suppress all dissent.
  3. The US dollar floats, the Renmimbi (Yuan) doesn't. Thus, China can manipulate it currency, albeit with risks of capital flight, to mitigate some or all of US tariffs.

Currency charts can be confusing. Sometimes up is down and sometimes down is up, It depends on which currency is first. The lead chart shows a 7.4% decline in the yuan vs the US dollar since April 16.

Meanwhile the dollar index itself has advanced.

US Dollar Index

The Euro has the biggest weight in the index.

  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF) 3.6% weight

Euro Impact

Because the euro floats and the Yuan doesn't, Europe is caught in the fight. This is precisely why the EU asked Trump to join with it to fight China. Trump rejected the idea.

Germany, one of Trump's hot button, is in a bad bind, especially given the rising threat of a hard Brexit.

The EU can scarcely afford to be in a simultaneous trade war with the US, China, and the UK.

Yet, that is precisely where we are.

One Question

Is anyone winning?

Clearly, not.

But if the current path continues the EU will be the biggest loser. The US and China can change tactics overnight. It takes the EU a decade to do anything.

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Mike "Mish" Shedlock

Comments
No. 1-17
caradoc-again
caradoc-again

Forget it. Will not be allowed to happen.

shamrock
shamrock

That's great, you can use it to pay the tariffs.

Tony_CA
Tony_CA

The EU needs to be completely dismantled.

Zardoz
Zardoz

Well, my cash horde just got 6% more valuable, so I guess I'm winning....

oudaveguy98
oudaveguy98

Wouldn't be surprised if Trump agreed with Mish on tariffs given his use of the phrase, "fair trade." But I suspect he knows tariffs are easier to implement than free trade deals that largely benefit everyone but the US, and has opted for doing something over nothing.

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