China’s decision to allow its yuan currency to fall against the dollar below the level it has defended for weeks highlights the possibility that 2025 will witness major tensions over exchange rate policy, Bloomberg said in a report.
US President-elect Donald Trump and his deputies have long accused US trading partners of gaining an unfair advantage for their exporters by seeking to lower the yuan’s exchange rate.
In an interview with Bloomberg last June, Trump singled out China and Japan for keeping their currencies cheap, saying they imposed a “huge burden” on American companies.
According to Bloomberg, the decline of the yuan more than before will not go unnoticed by Trump and his new team. Last June, he noted that his first administration was too focused on keeping foreign exchange rates “high” through threats of tariffs.
Unilateral agenda
While there are understandable reasons for the devaluation of the Chinese currency (interest rates fell to new lows after domestic demand stagnated), Trump’s history indicates a lack of interest in easy policies (lowering exchange rates).
But in fact, the big risk facing everyone is that the recent decline in the value of the yuan will fuel Trump’s determination to advance a unilateral international economic agenda that looks dangerously similar to the agenda of the 1930s, according to Bloomberg.
Currency wars are not new. The most famous of them broke out in the 1930s, when the United States and other countries engaged in devaluing their currencies in addition to raising customs tariffs, which led to the deterioration of global trade as a whole, as a recent research paper issued by the US National Bureau of Economic Research shows.
Using a new database of quarterly trade flow data from that period, economists Chris Mitchener of Santa Clara University’s Levy School of Business and Kirsten Wandschneider of the University of Vienna found that the currency wars of the 1930s reduced trade by at least 18%.
According to Mitchener and Wandschneider, the currency devaluations of the early 1930s signaled a new approach to policy making, in which countries prioritized their domestic economic situations over the international system.
Devaluation of currencies
Newly elected President Franklin Roosevelt demonstrated his “America First” approach in 1933, with the result that more than 70 economies ended up devaluing their currencies, disrupting trade flows as costs and broader trade tensions rose.
After World War II, the United States adopted a completely different approach; It has become more willing to open its markets and participate in global economic and financial coordination, and this happened again in the wake of the financial crisis in 2008, when the United States and other G20 member states pledged to abandon competitive currency devaluations.
Now, according to Bloomberg, the atmosphere has become more similar to that of the 1930s. Roosevelt’s lack of fear of violating previous norms and his disregard for international pressure are very similar to Trump’s.
Bloomberg Economics wrote last month: “Free trade is over, protectionism is over, debt anxiety is over, tax cuts are over, the American security guarantee is over, and self-defense is here.”
However, Trump’s promised tariff increases will likely fall short of the numbers he put forward during his campaign, including a global tax of up to 20% and tariffs on China of 60%, according to Bloomberg.
deal
China specialists Arthur Kroeber and Thomas Gately wrote in Gavical Dragonomics last month that their basic hypothesis involves some kind of deal between Trump and Chinese President Xi Jinping that “freezes tariffs and export controls at a level that both sides can tolerate.”
But the danger is that Washington or Beijing miscalculates its response to the other side and goes too far, leading to the kind of escalation in trade measures seen in the 1930s.
“Even in the best-case scenario, the shift from free trade to protectionism is bad news for the global economy,” Orlik wrote. “If Trump imposes tariffs in full force, everything from Apple’s supply chain in Asia to GM cars made in Mexico will “He will be at risk.”
