A8 N THE NEW YORK TIMES INTERNATIONALTUESDAY, AUGUST 6, 2019
To most people, Aug. 9, 2007,
was an ordinary enough summer
day. The stock market fell about 3
percent, enough to lead the major
newspapers, but hardly anything
that would generate panic in the
streets.
Yet to many people who work in
economic policy or financial mar-
kets, that day was the beginning
of what would eventually be called
the global financial crisis. It was
the day that lending froze up
among banks within Europe,
trigged by the breakdown in the
market for bonds backed by
American home mortgages, and
central banks first intervened to
try to keep money flowing.
Monday felt eerily similar, and
not just because it was another
August day in which the stock
market fell by nearly identical
amounts: The drop in the S&P 500
was 2.96 percent in 2007 and 2.
percent Monday.
For months, people who study
economic diplomacy between the
United States and China have
warned that the world’s two big-
gest economies are on a collision
course, that the trade war be-
tween the two will have no easy
resolution, and that this tension
could spill into other areas of pol-
icy and create dangerous ripple
effects for the world economy.
In the last several days, that
pessimistic story has become
more real.
On Thursday, President Trump
said he would place 10 percent tar-
iffs on $300 billion in Chinese
goods, ending a period in which
there seemed to be some easing of
tensions between the two nations.
On Monday, the Chinese govern-
ment allowed its currency to fall
below a symbolically important
seven-to-the-dollar level, an ap-
parent retaliatory move that
amounts to trade tensions spread-
ing into another arena. The United
States returned fire by naming
China a currency manipulator.
The swings in financial markets
Monday are hard to justify in nar-
row terms. A slightly cheaper Chi-
nese currency shouldn’t have
huge consequences for the global
economy. Rather, investors are
coming to grips with the reality
that the trade war is escalating
and spreading into the global cur-
rency market.
While the drop in the stock mar-
ket gets the attention — the S&P is
down 5.8 percent in the last week
— it is global bond markets that
are flashing the most worrying
signs about the outlook for growth
in the United States and much of
the world. Ten-year Treasury
bonds yielded 1.72 percent at Mon-
day’s close, down from 2.06 per-
cent a week earlier — a sign that
investors now believe that weaker
growth and additional interest
rate cuts by the Federal Reserve
are on the way.
“The Chinese have sent a
strong signal that they are ready
to rumble,” said Paul Blustein, a
senior fellow at the Centre for In-
ternational Governance Innova-
tion and the author of “Schism,” a
book due out next month about
the fraying relationship between
the United States and China. “Todepreciate the currency at such a
fraught time sends a signal that
they are prepared to endure a
heck of a lot of pain, and it doesn’t
surprise me that markets would
finally come around and say, ‘This
could be really bad.’ ”
As we’ve seen many times
through this trade war, escalation
and de-escalation can come at
seemingly any time. President
Trump could back away from his
latest tariff threat and calm things
down, or move the opposite direc-
tion by increasing the tariff to be
charged on those $300 billion in
imports from China. But one re-
curring theme of the last two
years is that trade conflicts in the
Trump era never seem to become
fully resolved, but rather go
through more-intense versus less-intense phases.
Whatever happens next — and
whether this turns out to be the
beginning of a major turning point
for the global economy or just one
rough day on the markets — it is
clear that the trade war is no long-
er confined to trade.
While President Trump has of-
ten accused China of seizing ad-
vantage in global trade by ma-
nipulating the value of its cur-
rency to keep it lower, the latest
developments reflect pretty much
the opposite. In fact, a slowing
Chinese economy is creating
downward pressure on the ren-
minbi — a pressure that China’s
government has resisted, through
intervention by its central bank
and capital controls, to try to keep
Chinese citizens from movingmoney out of the country.
On Monday, the Chinese essen-
tially reduced the scale of that in-
tervention and let the value of the
yuan fall closer to the level it
would reach in an open market.
The risk is that President
Trump and eventually leaders of
other nations will conclude that
currencies are now fair game —
that they are an appropriate
weapon to use in trade disputes.
For weeks Mr. Trump has pilloried
the Federal Reserve for not cut-
ting interest rates more, arguing
that this has made the value of the
dollar excessively high, hence
weakening American exporters.
Trade and currency disputes
have historically gone hand in
hand. Most notoriously, during the
Great Depression nations com-
peted to devalue their currencies
in “beggar-thy-neighbor” policies
that made everyone poorer. It’s
less clear what a 21st-century cur-
rency war would look like.
Major nations have mostly
agreed not to take action to artifi-
cially depress their currencies at
the expense of their trading part-
ners. But setting monetary and
fiscal policies aimed at helping
your domestic economy is consid-
ered O.K., even if doing so has im-
plications for currencies. The
thing is, it can be debatable which
bucket a given policy fits into. For
example, countries including Ger-
many, China and Brazil accused
the United States of manipulating
its currency when the Fed en-
gaged in “quantitative easing”
policies in 2010 that depressed the
value of the dollar.If Mr. Trump directs his admin-
istration to try to drive the value of
the dollar lower using Treasury
Department authorities to inter-
vene in markets, or prevails upon
the Fed to more aggressively
lower interest rates in order to de-
press the value of the dollar, that
could embolden not just China but
other economic powers, like Ja-
pan, South Korea and Europe to
do the same.
The entire structure of interna-
tional institutions meant to pre-
vent Depression-era policies
would be under threat. In that sit-
uation, no nation would be able to
achieve lasting economic advan-
tage, but a set of financial institu-
tions that have served the world
well could be undermined.
“If you don’t change the eco-
nomic fundamentals, intervening
in currency markets won’t be ef-
fective,” said David Dollar, a sen-
ior fellow at the Brookings Institu-
tion and a former Treasury De-
partment representative in China.
Citing organizations like the
World Trade Organization, he
said, “The question for me is, does
this end up damaging the core
economic institutions?”
Nothing about the world econ-
omy over the last few years has
been linear or predictable. There
is no reason that the events of
Aug. 5, 2019, need to be the first
chapter of future books about the
Global Recession of 2020. But to
avoid that result, it matters that
world leaders understand just
what is at stake — and the perva-
sive pessimism in markets Mon-
day was a good indication.‘Ready to Rumble’: U.S.-China Fight Puts World Economy on the Brink
By NEIL IRWINAmerican stocks nosedived in early trading on Monday.RICHARD DREW/ASSOCIATED PRESSand that does not justify the label
of currency manipulation,” Mr.
Bergsten said. “You can be unhap-
py that their currency went down,
but it did so in large part because
of what you just did to them.”
A significant devaluation could
also hurt China itself. Many of its
biggest and most indebted compa-
nies in sectors like property and
heavy industry have borrowed
huge amounts overseas in Ameri-
can dollars. A weaker renminbi
makes paying that debt back
more expensive. It could also hurt
companies that depend on com-
modities, such as oil, that are
priced in dollars, and it could spur
wealthy Chinese to take their
money out of the country.
For those reasons, devaluations
make investors nervous. Four
years ago, when China devalued
its currency more drastically, a
global market rout followed.
Financial markets suffered an-measures have given a country.
But China is likely to view the la-
bel as a rebuke, further escalating
pressures between the countries.
The move will finally fulfill Mr.
Trump’s campaign pledge to des-
ignate China a currency manipu-
lator. As a presidential candidate,
Mr. Trump was sharply critical of
China’s currency practices and
promised to label China a manipu-
lator if elected.
Until Monday, Mr. Trump’s
Treasury had declined to apply
the label to China in the five cur-
rency reports it issued since the
president took office. Instead, it
has said the United States has
deep concerns about China’s in-
tervention in its currency.
Economists say that China held
down the value of its currency for
many years, but it had ceased that
practice by the time Mr. Trump
came into office. Ultimately, Mr.
Trump was persuaded by his ad-
visers to hold off on the label. In its
most recent currency report, in
May, the Treasury Department
criticized China’s trade and cur-
rency practices but still did not
conclude that Beijing was improp-
erly devaluing its currency.
The hardened positions under-
score the increasingly tough path
to resolving the trade dispute,
which has begun to inflict damage
across the global economy. Ameri-
can and Chinese negotiators met
in Shanghai last week, the first
face-to-face discussions since
trade talks collapsed in May, but
made little progress in resolving
their differences.
The question now is whether
Beijing will allow its currency to
weaken further and what Mr.
Trump may do in response. The
two sides have been locked in an
intractable tit-for-tat economic
war, with China meeting Mr.
Trump’s tariffs with punishment
of its own.
The United States has already
imposed tariffs on $250 billion
worth of Chinese goods, placed
tougher restrictions on Chinese
investment, banned some Chi-
nese companies from doing busi-
ness with American companies
and begun restricting visas for
Chinese graduate students in sen-
sitive research fields like robotics
and aviation. Those moves were
aimed at getting China to open its
markets to American companies,
protect American intellectual
property and buy more agricul-
tural products, none of which have
happened yet.
On Monday, Mr. Trump accused
China of manipulating its cur-
rency and suggested he would
look for ways to retaliate.
“China has always used cur-
rency manipulation to steal our
businesses and factories, hurt our
jobs, depress our workers’ wages
and harm our farmers’ prices. Not
anymore!” the president wrote.
“It should have been stopped
many years ago!”
If China allows its currency to
fall even more, countries in East
and Southeast Asia that compete
in similar industries could face
market pressure to devalue their
own currencies. Such devaluation
spirals can lead to higher inflation,
pinched household spending and
disruptive shifts of money across
borders. They can also lead to
more tariffs or other restrictive
trade measures.
“It’s hugely significant as they
are making a clear choice to do
this,” said Michael Every, head of
financial markets research in Asia
for Rabobank, referring to China’s
central bank. “This is going to es-
calate rapidly and badly.”
C. Fred Bergsten, director
emeritus at the Peterson Institute
for International Economics, said
he thought the label was unjusti-
fied. China’s currency has weak-
ened largely because of greater
economic forces, as investors sold
the currency in response to Mr.
Trump’s tariff threat, he said.
“Unless they have some evi-
dence they have not unveiled, it’s
pretty clear the renminbi weak-
ened because of market forces,other slump on Monday, with com-
panies exposed to the next round
of Mr. Trump’s tariffs hit particu-
larly hard, including retail and
technology stocks. The tech gi-
ants Microsoft and Apple dropped
more than 3.4 percent and 5.2 per-
cent respectively. Selling was
heavy in shares of computer chip-
makers, which generate signifi-
cant revenue from sales to tech-
nology manufacturers based in
mainland China. Retailers like
Nike and Best Buy also declined.
The two sides in the trade war
seemed close to a deal in May. But
after Beijing rejected some of
America’s demands, talks col-
lapsed and Mr. Trump put in place
plans to tax another $300 billion
worth of imports.
In June, Mr. Trump agreed to
hold off on additional tariffs after
meeting with Mr. Xi in Japan. But
last week, Mr. Trump said he
would impose 10 percent tariffs onanother $300 billion worth of Chi-
nese goods as punishment for Bei-
jing’s failure to make large-scale
purchases of American farm prod-
ucts, like soybeans.
On Monday, Beijing indicated
that those purchases would not be
forthcoming anytime soon.
Xinhua News Agency cited Chi-
na’s economic planner, the Na-
tional Development and Reform
Commission, and the commerce
ministry as saying that Chinese
companies were suspending pur-
chases of American agricultural
products in response to the Trump
administration’s plans to impose
new tariffs on $300 billion in Chi-
nese exports to the United States.
The report said that China had
not ruled out imposing its own tar-
iffs on newly purchased American
agricultural imports and that the
Chinese companies suspended
their purchases.
Zippy Duvall, the president of
the American Farm Bureau Fed-
eration, called the announcement
“a body blow to thousands of
farmers and ranchers who are al-
ready struggling to get by.” Amer-
ican exports to China fell $1.3 bil-
lion during the first half of the
year, and American farmers now
stand to lose all of what was a $9.
billion market in 2018, Mr. Duvall
said. That had fallen from a $19.
billion market in 2017, before the
trade war began.
The escalating trade war al-
ready threatens to end what had
looked to be a modest global ex-
pansion. The American economy
still looks relatively strong, but
growth in the service and manu-
facturing industries is slowing.
The European economy has also
been weak, as the trade war
weighs on export-dependenteconomies like Germany and Ita-
ly. China’s growth has been hurt
by the trade war, which has com-
pounded some of its homegrown
problems. Other countries that
depend on China’s voracious eco-
nomic machine, such as Japan,
have been harmed as well.
Yi Gang, the central bank’s gov-
ernor, attributed the move in the
renminbi, or RMB, to market
forces, adding that many curren-
cies had depreciated against the
dollar recently. “I am confident
that the RMB will continue to be a
strong currency,” Mr. Yi said in an
article published to the social me-
dia account of the central bank.
The renminbi weakened about 1
percent against the dollar overall,
a move that is not necessarily sig-
nificant on its own. But the fact
that Beijing allowed it to breach a
level long considered symbolic
raised questions about whether
the move was a deliberate threat
from China’s leaders, who would
most likely have to give permis-
sion to the central bank to let its
currency fall to such a level.
“The currency is largely con-
trolled by the P.B.O.C., but the
P.B.O.C. does not have the inde-
pendence to decide on its own the
level of the renminbi,” said Mi-
chael Pettis, a professor of finance
at the Guanghua School of Man-
agement at Peking University, re-
ferring to the central bank. “This
was clearly a decision made
higher up.”
Mr. Trump has increasingly
looked for ways to counteract
China, including considering
whether the United States should
weaken its own currency. He and
his advisers discussed interven-
ing in currency markets to artifi-
cially weaken the United States
dollar in late July, but the presi-
dent decided against the idea.
Mr. Trump has also been jaw-
boning the Federal Reserve to cut
interest rates, including on Mon-
day. “China dropped the price of
their currency to an almost a his-
toric low,” He wrote on Twitter.
“It’s called ‘currency manipula-
tion.’ Are you listening Federal
Reserve? This is a major violation
which will greatly weaken China
over time!”
The Fed did cut rates last week
for the first time in a decade, a
move taken in part to help the
American economy weather the
impact of Mr. Trump’s trade war.
But Mr. Trump’s trade policies
are counteracting some of the
Fed’s efforts to stimulate the econ-
omy. The American tariffs on
China slow China’s growth, weak-
ening its currency and making the
American dollar relatively strong.
A stronger dollar cuts into infla-
tion in the United States, and it
might force the Fed to cut interest
rates by more than it would other-
wise to sustain its desired pace of
growth and price gains.
“The dollar has a very mechan-
ical impact in the way the Fed
thinks about its main policy lever,”
said Neil Dutta, head of United
States economics at Renaissance
Macro Research. “By doing noth-
ing, the Fed is de facto sanctioning
a tightening in policy. They would
need to lower rates just to keep
pace.”
Mr. Dutta thinks the weakening
of the renminbi and the escalation
of the trade war increase the likeli-
hood that the Fed will cut rates
half a percentage point at its next
meeting, in September.China Uses Currency as Lever in Trade Feud With U.S., Jolting Markets
Above, the Tianjin port area in
China. A weaker Chinese cur-
rency can make the country’s
goods cheaper to sell abroad,
but it can also backfire.LAM YIK FEI FOR THE NEW YORK TIMESBOBBY YIP/REUTERSAna Swanson and Jeanna Smialek
reported from Washington, and Al-
exandra Stevenson from Beijing.
Albee Zhang and Claire Fu contrib-
uted research.
From Page AThe 45th PresidentTrade Policy