Will Trump’s Trade War Precipitate a Currency War?

Koper, Slovenia - March 07, 2015: This huge "China Shipping Line" container ship is unloading containers with goods from China, in port of Koper in Slovenia. Photo was taken 07.March 2015.

By Dr. Jack Rasmus

(3rd in a series on Trump Trade policy)

Last week, mid-July, Trump threatened $500 billion in tariffs on China imports, escalating his prior threat to impose $200 billion on China. He then threatened hundreds of billion in tariffs on world auto parts imports, targeting Europe. But Trump’s threats and announcements do not constitute a trade war. Threats and even announcements of tariffs are one thing; the actual implementation of tariffs another.  But even the current scope of tariff implementations do not yet represent a trade war. Bona fide trade wars occur when tariff fights spill over to currency devaluations and generate currency wars.


To date, only $34 billion in tariffs on China industrial imports to the US has been actually implemented, plus another $2-$3 billion in intermediate steel and aluminum products.  In response, China has so far imposed an equivalent $36 billion in tariffs on imported US agricultural goods, targeting US soybeans, port, cotton and other grains produced in Trump’s political base of the US Midwest agricultural belt.

Elsewhere around the globe, earlier in July Trump threatened to escalate a trade conflict with the European Union, threatening to impose $200 billion on Europe and global auto part imports to the US. But to date there’s only been US tariffs implemented on Europe steel and aluminum imports. And the response from Europe has been a mere $3 billion in counter tariffs on US imports.  Ditto for trade with Mexico-Canada. US steel-aluminum tariffs on imports from Mexico-Canada have elicited a token response of $15.8 billion in Mexican and Canadian tariffs on US imports.

Total actually implemented US import tariffs to date—mostly levied against China—amount to only $72 billion, or 2.3% of a total of $3.06 trillion imports into the US annually. US trading partners have responded measuredly in kind, with their own 2.3% in tariffs on US exports on the total $2.58 trillion US exports worldwide.  Tariffs of 2.3% hardly represent a tariff war, let alone a trade war. Bona fide trade wars are never limited to tariffs. Trade wars involve not only tariffs but also non-tariff barriers to trade. Even more important, bona fide trade wars occur when tariff spats escalate and precipitate currency devaluations.

Should Trump follow through with threats of $200-$500 billion more tariffs on China imports, the US and China will likely slip into a currency war as China allows its currency, the Yuan, to devalue further. And that devaluation will almost certainly quickly go global— given the current significant decline in currency exchange rates already taking place throughout various throughout key emerging market economies (Argentina, Turkey, India, etc.). Other emerging market economies will have no choice but to follow China’s devaluation lead.  Nor will advanced economies like Japan and Europe be immune from having to devalue, as they to offset Trump tariffs in order to maintain their share of global trade that Trump policies are clearly attacking.

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About the Author 
Dr. Jack Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, also by Clarity Press. He blogs at jackrasmus.com and tweets @drjackrasmus.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.