Threat of U.S.-China Currency War, and How It Might Be Ended

Aug. 6, 2019 (EIRNS)—President Donald Trump’s Treasury Secretary Steven Mnuchin late on Aug. 5 designated China a “currency manipulator” after the yuan fell to below 7 to the dollar as a result of global currency speculation following the latest U.S. tariff announcement. A Treasury statement said: “Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator. As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions. This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation.”

The administration appears to have gotten unnerved when the new tariffs and following drop in the yuan triggered a plunge of more than 3% in U.S. stocks Monday, Aug. 5. It was looking only at the surface, the “proximate cause.” Trump demanded more interest-rate cutting from the Federal Reserve in a Twitter message: “China dropped the price of their currency to an almost a historic low. It’s called currency manipulation. Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

The People’s Bank of China responded Aug. 6, “The U.S. labeling is an arbitrary unilateral and protectionist practice, which ... will significantly impact the global economy and financial markets.” China has not intervened to set a yuan value since 2013. Since that time it has maintained a managed float of the currency, with major currency speculators, including George Soros, shorting it aggressively. Deliberately devaluing would cost China foreign reserves which sustain its investments in infrastructure domestically and worldwide.

America could ask WTO action against China; could try (through the IMF) to get allies to declare China a manipulator; could declare “punitive” tariffs, although most of the tariffs already have been punitive. There are “extreme” options” To order Treasury or even (under color of “emergency”) the Fed to sell dollars to drive down their value. That would be currency war.

President Trump recognizes the salient fact that the dollar has appreciated significantly against all other major currencies since early 2018. This is due to capital flows into the United States economy following the large corporate tax cut of Jan. 1, 2018. The Fed cannot weaken the dollar by cutting rates: Those of the other major central banks are already below zero!

U.S.-China tensions are now intense. A solution can only appear from a higher economic standpoint, and then, only if and when Trump’s circles recognize the U.S. “recovery” is breaking down and debt bubbles are ready to explode. At that point, the way out of currency war would also foster recovery: Agree on new currency values with a significant yuan increase against the dollar; keep the new values stable with currency controls; and remove all tariffs since mid-2018. China’s capacities for investment in great projects in North and South America—jointly with a U.S. credit institution—would greatly increase.