For what feels like the thousandth time now, China is showing why trade wars are not, as President Donald Trump put it, “good, and easy to win.”
Last week, the president decided to ratchet up his confrontation with Beijing, announcing that he would soon impose tariffs on another $300 billion of Chinese imports. If he goes forward with the move, essentially all of the goods China sells to the U.S. will face taxes at the border. Now, the People’s Republic is hitting back. Government officials have told state-owned companies to “suspend purchases of U.S. agricultural products,” Bloomberg reported Sunday—a retaliatory move putting further pressure on American farmers that one analyst described as “an 11” on a scale of 1 to 10. And the Chinese aren’t stopping there. The government also allowed its currency to dramatically depreciate during trading Monday, letting it fall to an all-time low in the important offshore market.
China actively manages the value of its currency, and in recent years it has taken steps to stop it from dropping too far. By permitting it to crash through the symbolically key level of 7 yuan to the dollar, the Chinese will ensure that their exports will be cheaper for American buyers, which will somewhat counteract the effect of Trump’s tariffs, while making U.S. goods more expensive in China. But they are also showing a willingness to turn a trade war into a currency war (Donald Trump, for his part, angrily accused the country of engaging in “manipulation”), which is the sort of thing that makes investors and companies deeply anxious. Hence the stock market is getting absolutely rocked on Monday.
One major reason why Wall Street is collectively nervous is that there is no obvious way this conflict can be resolved. Trump reportedly decided to impose tariffs in spite of the fact that all but one of his advisers opposed them. (The exception was Peter Navarro, the White House’s anti-China trade adviser.) He is hellbent on “winning,” whatever that means, and appears convinced, despite all available evidence thus far, that he can eventually grind the Chinese down through sheer stubbornness. But Beijing is standing firm, because it is determined to project strength both at home and abroad, and backing down now would instead show vulnerability.
China’s moves this week are also a reminder that officials there have tools at their disposal that Trump really does not. Chinese leaders have vastly more power over the yuan than Trump does over the dollar. They also have vastly more sway over what domestic businesses can and can’t import. Trump can unilaterally impose tariffs, in part because Congress has decided to sit back and let him. He can try to kneecap Chinese companies by cutting them off from U.S. markets or suppliers on national security grounds. But, as much as he might like to, he doesn’t have quite the same flexibility as the bona fide authoritarian state.
And that brings us to the biggest difference between the Chinese leaders and Trump right now. Only our president has to face an election any time soon. Up until this point, Trump has managed to protect himself from political backlash to his trade war by spending billions to bail out farmers hurt by China’s countermeasures. But the conventional wisdom is that the U.S. economy is still suffering from this standoff, and the stock market reaction is, as we’ve seen so far Monday, brutal. If Wall Street continues to shudder, and business investment continues to dry up (hurting economic growth and hiring), Trump may eventually have to choose between his political future and his pride.