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Trump’s China Shock

Summary:
I didn’t know that the Dow was going to drop 750 points, so my latest column is El Paso-related. Probably the right choice anyway, because US-China is moving so fast that anything in the print paper would be out of date.But it does look as if I should try to explain (a) what I think is happening (b) why the markets are going so nuts. By the way, given Mnuchin’s declaration just a few minutes ago that China is a currency manipulator, tomorrow’s market action should be … interesting.So here’s the thing: neither Trump’s tariff announcement last week nor, especially, the depreciation of China’s currency today should objectively be that big a deal. Trump slapped 10 percent tariffs on 0 billion of Chinese exports, which is a tax hike of 0.1 percent of US GDP and 0.15 percent of Chinese GDP.In

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I didn’t know that the Dow was going to drop 750 points, so my latest column is El Paso-related. Probably the right choice anyway, because US-China is moving so fast that anything in the print paper would be out of date.

But it does look as if I should try to explain (a) what I think is happening (b) why the markets are going so nuts. By the way, given Mnuchin’s declaration just a few minutes ago that China is a currency manipulator, tomorrow’s market action should be … interesting.

So here’s the thing: neither Trump’s tariff announcement last week nor, especially, the depreciation of China’s currency today should objectively be that big a deal. Trump slapped 10 percent tariffs on $200 billion of Chinese exports, which is a tax hike of 0.1 percent of US GDP and 0.15 percent of Chinese GDP.

In response, China let its currency drop by about 2 percent. For comparison, the British pound has dropped around 9 percent since May, when it became clear that a no-deal Brexit was likely.

So why are these smallish numbers such a big deal? Mostly because we’ve learned things about the protagonists in this trade conflict, things that make a bigger, longer trade war seem a lot more likely than it did even a few days ago.

First, Trump really is a Tariff Man. Some naïve souls may still have been hoping that he would learn something from the failure of his trade policy so far. More sensible people hoped that he might do what he did with NAFTA: reach a new deal basically the same as the old deal, proclaim that it was totally different, and claim a great victory.

But no: it’s pretty clear now that he refuses to give up on his belief that trade wars are good, and easy to win; his plan is to continue the beatings until morale improves. What may have looked like temporary tariffs designed to win concessions now look like permanent features of the world economy, with the level of tariffs and the range of countries facing them likely to expand over time.

Second, China is clearly signaling that it’s not Canada or Mexico: it’s too big and too proud to submit to what it considers bullying. That slide in the renminbi wasn’t a concrete policy measure as much as a way of saying to Trump, “talk to the hand” (no doubt there’s a good Chinese expression along these lines.)

Incidentally — or maybe it’s not so incidental — while there are many valid reasons to criticize Chinese policy, currency manipulation isn’t one of them. China was a major currency manipulator 7 or 8 years ago, but these days if anything it’s supporting its currency above the level it would be at if it were freely floating.

And think for a minute about what would happen to a country with an unmanipulated currency, if one of its major export markets suddenly slapped major tariffs on many of its goods. You’d surely expect to see that country’s currency depreciate, just as Britain’s has with the prospect of lost market access due to Brexit.

In other words, the Trump administration in its wisdom has managed to accuse the Chinese of the one economic crime of which they happen to be innocent. Oh, and what are we going to do to punish them for this crime? Put tariffs on their exports? Um, we’ve already done that.

So how does this all end? I have no idea. More important, neither does anyone else. It looks to me as if both Trump and Xi have now staked their reputations on hanging tough. And the thing is, it’s hard to see what would make either side give in (or even to know what giving in might mean.)

At this rate, we may have to wait for a new president to clean up this mess, if she can.

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Paul Krugman
Paul Robin Krugman (born February 28, 1953) is an American economist, Distinguished Professor of Economics at the Graduate Center of the City University of New York, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography.

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