All is Fair in Love and War
Eran Peleg, CIO August 8, 2018
Since arriving in Office, US President Trump has adopted a confrontational approach to foreign policy. International cooperation -- that has increasingly dominated the world order since World War II -- has been thrown out of the window. As we have written before, this is a general cause for worry.
However, when it comes to current trade tensions with China, it is easy to understand why the US has been adapting its approach. China’s economic success over the past few decades has resulted in a significant change in the country’s economic position. Historically, China was a manufacturer of low value-added widgets and plastic toys – and US businesses and consumers benefited from the cheap imports. At the same time, the US was exporting to China higher value-added products. This all worked quite well until China moved up the value chain, and started to compete, head-to-head with the US, in the same products. For example, it was just announced that Huawei knocked Apple out of the 2nd place in worldwide smartphone sales.
So, the US has gone to war, a trade war. The US is imposing tariffs on Chinese goods, and the Chinese are fighting back. There is much to say about this trade war (and much IS being said…) – what are the risks and potential benefits, what are the respective players’ advantages and disadvantages, etc. However, although it may not have been so to the US Administration from the start, one point is quickly becoming very apparent: a trade war is not just about tariffs. It is about competitiveness. And when it comes to competitiveness, China has more levers it can pull. China has more control over its economy. Its leaders can quickly decide on additional fiscal stimulus, while the US administration needs to get the approval of Congress. The Chinese authorities can easily take down interest rates, while in the US, monetary policy is managed by the Federal Reserve, an independent, professional body. And finally – China controls its currency’s exchange rate, while the US has relatively little control over the dollar.
See what happened recently: how did the Chinese react to the 10% tariff the US announced it was going to impose on Chinese goods? They didn’t say much. They plainly depreciated the Chinese Yuan (against the US dollar) by nearly 10%, and thus largely negated the potential impact of the US tariff increase.