Currency markets expose a crucial flaw in Trump’s China tariffs

Bloomberg/Katherine Greifeld/6-14-2019

“After Trump raised tariffs on $200 billion of Chinese imports last month, the yuan quickly fell toward 7 per dollar — a level not seen since the financial crisis. The drop effectively reduced the price of Chinese imports in dollars and has blunted the cost shock of higher tariffs. (The same thing happened with the peso following a similar threat against Mexico in late May; the peso plunged over 2% in less than an hour.)”

USAGOLD note:  The hole in this argument is that China does not appear to have a great deal of interest in allowing significant depreciation of the yuan and it has the reserves to mount a credible defense of the yuan if it so chooses.  History has shown that the free market ultimately overrides currency interventions so we will have to see how all of this works out.  Goldman recently suggested a 2019 Sino-American version of the Plaza Accord might be imminent. That agreement between Japan and the United States under similar circumstances in 1985 allowed for a depreciation of the dollar against the yen.