A week ago, China allowed its currency to depreciate past a key benchmark of seven yuan to the dollar, a record low. A cheaper currency translates into cheaper imports, and offsets to some degree the hardship from tariffs on goods made in China.
This sent markets plummeting and pundits castigating the Trump administration for further damage from the trade war. Armageddon, or at least recession, was predicted. But markets have since recovered, sensing the truth that neither side in this war has a particular interest in fighting it, as can be seen from subsequent actions. That’s actually a shame, because it frustrates the real need to reverse a manufacturing supply chain that is bad for workers, bad for global security, and even bad for China’s attempts to modernize its economy.
The game was up when Trump struck back in the most ineffectual manner possible, slapping a currency manipulation label on China, even though, if anything, China was intervening to prop its currency up artificially in the years prior. By using a 1988 definition of currency manipulation instead of a 2015 update, the designation comes with essentially no penalties, beyond a consultation with the International Monetary Fund on how to best “eliminate the unfair advantage.” Nothing concrete need come from that.
Despite the symbolism, the designation did appear to weaken China’s resolve. By Thursday, China set a daily midpoint for the yuan at slightly above seven; the price can fluctuate in a narrow range above and below that. That peg was stronger than the market had predicted, and stabilized the currency, albeit below where it was.
It’s hard to escape the belief that both sides want this trade war kept cold. China appears keen to wait out the United States until the next election, managing whatever decline the tariffs might bring. There’s little interest from China in having Trump as a negotiating partner, and maybe after 2020, it won’t have to. China suspended agricultural purchases along with the currency drop, in a clear effort to put a thumb on the scale by attacking Trump’s fleeting electoral-vote advantage in the Midwest.
The yuan devaluation probably had less to do with the U.S. than it did the slowing Chinese economy, as leaders have found the shift to a service-based consumer-spending model more difficult than imagined, however necessary as a means to manage a restless working class. Though China’s central bank cited trade disputes as a reason for the depreciation, that makes for a nice cover story. In truth, it wasn’t retaliation, but a concession to reality that the attempt to bolster the yuan as goodwill with Trump during negotiations was having too strong an effect on imports.
Trump, for his part, has shown himself in high-stakes negotiations to be little more than a coward. He will levy a tariff here and there, or at least threaten one, and then pull back before the escalation gets out of hand. This may reflect the restraining impulses of certain staff members—chief trade negotiator Robert Lighthizer (who actually understands China), but also the finance establishment represented by Treasury Secretary Steve Mnuchin.
Lighthizer and Mnuchin agree on little else, but Wall Street and corporate boardrooms would rather maintain the status quo, and enjoy the benefit from low-wage outsourcing. And that has encouraged Trump to decelerate whenever trade wars navigate into difficult territory.
Meanwhile the trade deficit with China has actually increased since the so-called trade war kicked off. It seems that Trump is content to keep the China issue open until next November too: After all, it beats devising a re-election agenda. If he has to, he’ll buy off farmers again.
This extend-and-pretend scenario, where both sides act as if in a war but undertake no fundamental changes in the relationship, doesn’t give hope to workers on either side of the Pacific Ocean. As Robert Kuttner pointed out this week, years of neglect of China’s economic aggression gave the country putative bargaining leverage over the U.S. But the answer to that was not a tit-for-tat with tariffs, which were never going to break a mercantilist country with plenty of tools to minimize the pain. Only by disentangling supply chains that should never have been bound together in the first place would America—and even China—find a better path.
In the interim, that has begun to happen, although not through onshoring but through a race to the bottom to other low-wage Asian countries. In many ways, that exodus explains the yuan devaluation. That the U.S. has not seen a manufacturing renaissance can be best explained by the quip attributed to former General Electric CEO Jack Welch, arguing that the best place to site your factory is a barge, which can move every time the cost of production increases.
The bigger problem lurks around the corner: The United States has lost its productive capacity and internal know-how. We don’t know how to make many things anymore. This has reached epidemic proportions in the defense sector, where previously perfunctory operations like casting a submarine are now beyond U.S. capabilities. Boeing, our main aircraft maker, apparently has lost the ability to build safe planes. When you relentlessly outsource to cut costs for decades, you don’t just lose jobs, but the intelligence and know-how and muscle memory to manufacture. And in a number of industries that’s what has occurred.
America has defied doomsaying predictions about the hollowing out of the industrial base before. But what it’s led to is an economy captured by financial interests and staffed by low-wage retail and service workers who struggle to build collective power. Manufacturing is not essential to an economy, but it may be more essential to an economy that works for everyone. And the lack of knowledge and industrial capacity has national-security implications that go beyond the economic frame.
So yes, Trump’s version of a tariff war is dumb, though it doesn’t logically follow that tariffs are a useless tool. But China wants to be less export-focused and America shouldn’t want to be led by the nose around global supply chains that do nothing for its middle class. Both of these outcomes are possible.
Instead of worrying that China won’t accept U.S. soybeans, change a system that put a glut of soybeans in farmers’ hands in the first place. Instead of running a losing race against China’s state-owned subsidies, invent our own industrial policy that builds off federally funded research and development and the ability to create our own markets in a country of 330 million. Instead of being hamstrung by China’s ever-present threat of currency depreciation, tax foreign purchases of U.S. financial instruments, as Senators Tammy Baldwin (D-WI) and Josh Hawley (R-MO) recently proposed, and discourage such larceny.
The fake war between two economic superpowers is in a sense a distraction from doing the important work that must get done—work that will take complex China diplomacy and clear goals for America’s own economy rather than a pretend trade war.
The other problem is that fake wars sometimes take on their own logic and turn into real ones that nobody wanted, World War I being history’s classic case. China is the realist in this drama, but there is a dangerous arms race between China’s realism and Trump’s impulsive incompetence.