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.

As I have noted, No Matter What Any Other Country Does, the Correct Action is to Reduce Tariffs.

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 (17)
No. 1-17

"Yuan has effectively declined 13.8%." China also cannot allow its currency to depreciate forever. There will be a full fledged capital flight that would need clamp downs etc. We will have to see who blinks first.

"Is anyone winning? Clearly, not."

That is OK. You cannot win from day one in a trade war! Both losing is better than one losing!

Because when there is one winner the other guy is a perennial loser but if both are losing at some point it will lead to a realization that it might be better to find a middle path so that both do not end up as losers. That this is not happening now does not mean it will not happen in the future. Given that politicians are the slimiest of human beings and have chameleon characteristics that enable them to change colors at the blink of an eyelid (without feeling any shame -- advantage of having a thick skin - goes for central bankers too -- who shamelessly heap praises on themselves for saving the world, by putting savers, prudent people and retirees under the bus and keeping them there for a decade, by sleeping at the wheel and creating the very fire they claim to have put out) they will change track as and when they want. It is also probably what Trump means when he says we will get a deal. It helps Trump that even today if US sneezes the world will get a cold (and that includes China too!).


EU trade deal with Japan. Probablly to garner more inward invetment in eastern states. Abe happy.


In a bear market, the winner is not necessarily the person who makes the most money, but the one who loses the least. Two hikers encounter a bear in the woods. One of the hikers take the sneakers out of his backpack and replaces the boots on his feet with sneakers. The other hiker asks, "What are you doing?!" The first responds, "I may not be able to outrun a bear, but I can outrun you."


Losing is the new ”winning”. People are even beginning to cheer for ”losing”. Funny but sad.


Does this mean China is going to increase their US debt holdings? May be a good thing since we'll be running record deficits for the foreseeable future.