“A currency war, fought by one country through competitive devaluations of its currency against others, is one of the most destructive and feared outcomes in international economics.”
So says James Rickards in his bestseller, Currency Wars: The Making of the Next Global Crisis. Written in 2011, Rickards’ book feels particularly prescient today, given China’s recent devaluation of its currency against the U.S. dollar—just the latest volley in the two economies’ escalating trade tensions.
The idea of a currency war “revives ghosts of the Great Depression, when nations engaged in beggar-thy-neighbor devaluations and imposed tariffs that collapsed world trade,” Rickards continues. “Nothing positive ever comes from a currency war.”
Be that as it may, China’s central bank on Monday allowed its currency, the renminbi, also known as the yuan, to weaken past 7.0 versus the dollar, a level unseen since 2008. A weaker currency gives China certain advantages over the U.S., including making its goods more competitively priced for foreign buyers.
The move follows President Donald Trump’s announcement that the U.S. will be imposing an additional 10 percent tariff on the remaining $300 billion of imports from China, effective September 1. This is on top of the 25 percent tariff that’s already in place on $250 billion worth of Chinese-made goods.
Global stocks sold off dramatically on Monday, as investors interpreted China’s decision as a sign that the trade war between the two countries is far from over. Late in the day, Treasury Secretary Steven Mnuchin made the bold move to designate China as a currency manipulator, writing that the purpose of the devaluation “is to gain unfair competitive advantage in international trade.”
It’s the first time since the Clinton administration that a country has been slapped with the label. It also makes good on one of Trump’s campaign promises, if you can remember that far back.