QNA
Washington
Bloomberg News reported that China’s decision this week to let its currency weaken against the dollar past a level it had defended for weeks highlights the potential for 2025 to see major tensions over exchange-rate policy.
President-elect Donald Trump and his allies have long accused US trading partners of gaining unfair advantage for their exporters by pursuing exchange-rate devaluation. He singled out China and Japan in a Bloomberg Businessweek interview last June for maintaining cheap currencies, saying they put a “tremendous burden” on US companies.
With the Chinese yuan even weaker now than back then, Beijing’s move will almost certainly not go unnoticed by Trump and his incoming team. In June, he noted that his first administration had been very focused on keeping foreign exchange rates “up” via tariff threats.
Bloomberg explained that while there are are readily understandable reasons for China’s currency depreciation its interest rates have been plumbing new lows thanks to still-stagnant domestic demand Trump’s history suggests disinterest in extenuating circumstances. The big risk for everyone is that the latest drop in the yuan will fuel Trump’s determination to proceed with a unilateralist international economic agenda, one that bears a dangerous resemblance to that of the 1930s.
Bloomberg said that despite its previous policies during 1930s, the US embraced a very different approach after World War II. It became much more willing to open its markets and participate in global economic and financial coordination through full-time institutions, including the International Monetary Fund. That sort of global camaraderie was seen again in the aftermath of the 2008 financial crisis, when the US and other Group of 20 members foreswore competitive devaluations.
However, today’s environment is more akin to the 1930s. Bloomberg Economics in its special report on the global outlook last month said, “free trade is out, protectionism is in. Worrying about the debt is out, tax cuts are in. The US security guarantee is out, do-it-yourself defense is in.” The danger is that either Washington or Beijing miscalculates in its response to the other side, and goes too far leading to the kind of escalation of mercantilist measures seen in the 1930s.
“The swing from free trade to protectionism is bad news for the global economy,” chief economist for Bloomberg Economics Tom Orlik said, adding that “if Trump goes full throttle on tariffs, everything from Apple’s Asia supply chain to GM’s made-in-Mexico autos areat risk.”
