Trump is staring down the barrel of yuan devaluation in US-China trade war

If three apocryphal words sum up the market’s mood right now, they are Trump, trade and China. US President Donald Trump’s trade brinkmanship with Beijing is doing untold damage to all concerned. Geopolitical stability, global growth and world financial market confidence are all at risk. Unless someone backs down soon, global markets will be on the cusp of another major meltdown. The stakes in the US-China trade dispute are running dangerously high.

Trump may be threatening to blitz Beijing with a further US$500 billion of tariffs but China has a super-weapon at its disposal – yuan devaluation. If China deploys competitive devaluation, then the world has a full-blown crisis on its hands – global trade and currency wars at the same time.

If Trump believes he can win a trade war with China, he is wrong. This is a war in which there will be no winners. It is not even a zero-sum game as everyone ends up losers – higher tariffs and trade quotas take no prisoners. Consumers will pay higher import duties, companies will lose business, trade flows will suffer and economic growth will slow – on both sides. Neither the United States nor China will come out unscathed. Nor will the rest of the world, for that matter.

Six months of wrangling over trade tariffs with Washington might have wiped about a fifth off China’s stock market value, but Beijing still holds the upper hand. China’s strong external trade position as the world’s largest exporter should never be underestimated, especially since the US is saddled with the world’s biggest trade deficit.

America’s trade gap with China is now running close to US$400 billion annually. It is fast running out of control, so it is no wonder Trump stepped in.