China just showed why Trump can't win with tariffs
An escalating tariff war is a losing strategy, but there's another way


China opened up a new front in President Trump's trade war on Monday, sending Wall Street into a tizzy.
Basically, China's central bank adjusted the value of its currency down to its lowest point in over a decade. Investors, fearing President Trump will respond with another tariff escalation, reacted by fleeing stocks for the safety of bonds and Treasuries — causing the S&P 500 and the Nasdaq to fall 3 percent and 3.5 percent, respectively, by the end of the day. And they're likely right. Yet it's also the case that the low value of the renminbi versus the U.S. dollar really is a problem worth addressing.
So is there any way America can combat China's currency machinations without a tariff war and the ensuing market panic? It turns out, there may be.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
Right now, as we all know, Trump is relying on tariffs to carry out his trade war. The primary strategy here is to browbeat China into accepting various reforms. But thus far, China hasn't been overly inclined to cooperate, and Trump's tariff threats keep escalating: He's already imposed 25 percent tariffs on $250 billion worth of Chinese exports to the U.S. And last week, he threatened a 10 percent tariff on another $300 billion worth, which would basically make every last dollar of Chinese exports subject to U.S. duties.
The drop in China's currency is a problem for this strategy because it largely neutralizes the pain of Trump's tariffs. The whole idea behind the tariffs is to raise the cost of Chinese exports in the domestic American market, so that Americans buy less of them. But a fall in the value of China's currency lowers the cost of those exports for Americans, thus offsetting the tariffs' effect. Indeed, the People's Bank of China explicitly said the new, lower value target was retaliation for the "unilateralism and trade protectionism measures and the imposition of increased tariffs on China." Trump promptly took to Twitter to rage about "currency manipulation."
The thing is, the Trump administration hasn't come up with any responses other than to impose even more tariffs on Chinese exports to punish drops in the renminbi. Beyond simply repeating the same strategy and hoping for a different outcome, this perpetual upward ratchet of tariffs is precisely what freaks out the markets. Tariffs disrupt specific industries with specific supply chains, invite retaliatory tariffs that do the same, and generally cause a great deal of headaches for investors.
Beyond all that, Trump's tariffs have also failed to rebalance the flow of trade between the U.S. and China — ostensibly the larger goal of the president's economic confrontation with our neighbor to the east. Our trade deficit with China has actually increased since Trump's trade war commenced.
Bottom line: the tariffs have brought a lot of pain for both sides while achieving little. Trump needs an alternative. And several are readily available.
When China's central bank engineers a drop in its currency, what it's doing in concrete terms is buying up financial assets denominated in U.S. dollars. That increases demand for the dollar, hiking its value relative to the renminbi. Bringing the two currencies back into a closer balance requires responding to those purchases in some fashion.
One option is to discourage the buying. For example, the U.S. government could impose a fee or tax on all foreign purchases of U.S. assets. Instead of slapping a tariff on Americans buying Chinese goods and services, we'd essentially slap a tariff on Chinese buyers purchasing U.S. financial instruments. Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.), for example, just put forward a bill that would give the Federal Reserve a new additional mandate to balance America's trade flows with the world within five years. And the tool they give the Fed to do this is a new fee to be imposed on all foreign purchases of U.S. stocks and bonds and so forth — effectively making it more expensive for China to engage in this sort of manipulation.
Now, Wall Street would probably hate this idea. To a certain extent, wealthy investors don't like any government efforts to intervene in trade flows because they just want to be left alone. But it should have minimal effects on the real economy. America is awash in cheap financial capital with or without Chinese investors.
Another option is to get even more surgical: America could buy up Chinese financial assets until the effect of their purchases of our assets are counterbalanced. In short, if China (or anyone else) raises the value of the U.S. dollar relative to their currency by creating demand for our assets, we can raise the value of their currency relative to ours by buying their assets, and neutralize the whole affair. Indeed, the easiest way to do this might be to take the same route Baldwin and Hawley did: Direct the Federal Reserve to bring our trade flows into balance by buying up financial assets denominated in China's renminbi, or in the currency of any other country our trade flows are out of whack with due to these sorts of interventions.
This would be even less disruptive than charging a fee for foreign purchases of our assets. Investors here and around the world could still buy whatever they wanted without interference; the Fed would simply be participating in the global markets with more strategic intention. As for the real economy, business models and supply chains would simply adjust to changing currency rates, which — in our ostensible global free market for currency exchanges — they already do.
Finally, these aren't just tools for prosecuting a trade war with China. They are tools for reforming America's trade flows with the entire world. Estimates suggest the U.S. dollar needs to fall by anywhere from 6 percent to 30 percent to resolve our trade imbalances with the globe. Tariffs are, at best, a horribly indirect method of adjusting currency values, and they do a lot of collateral damage. There are better ways to cut to the heart of the matter.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
Jeff Spross was the economics and business correspondent at TheWeek.com. He was previously a reporter at ThinkProgress.
-
Book reviews: 'The Thinking Machine: Jensen Huang, Nvidia, and the World’s Most Coveted Microchip' and 'Who Is Government? The Untold Story of Public Service'
Feature The tech titan behind Nvidia's success and the secret stories of government workers
By The Week US
-
Mario Vargas Llosa: The novelist who lectured Latin America
Feature The Peruvian novelist wove tales of political corruption and moral compromise
By The Week US
-
How to see the Lyrid meteor shower
The explainer A nice time to look to the skies
By Devika Rao, The Week US
-
Trade war with China threatens U.S. economy
Feature Trump's tariff battle with China is hitting U.S. businesses hard and raising fears of a global recession
By The Week US
-
How 'China shock 2.0' will roil global markets
Feature An overflow of Chinese goods is flooding the global market. Tariffs won’t stop it.
By The Week US
-
'New firms are created to serve the economy of which they are part'
Instant Opinion Opinion, comment and editorials of the day
By Justin Klawans, The Week US
-
Did China sabotage British Steel?
Today's Big Question Emergency situation at Scunthorpe blast furnaces could be due to 'neglect', but caution needed, says business secretary
By Sorcha Bradley, The Week UK
-
Taiwan's tricky balancing act
The Explainer The island nation, no longer certain of US backing against a hostile China, is quietly looking for other solutions
By Richard Windsor, The Week UK
-
America's woes are a foreign adversary's spy recruitment dream
IN THE SPOTLIGHT As federal workers reel from mass layoffs, the United States is becoming ground zero for international adversaries eager to snatch up disgruntled spies-to-be
By Rafi Schwartz, The Week US
-
Trump pauses some tariffs but ramps up China tax
Speed Read The president suspended most 'reciprocal' tariffs for 90 days and raised his tariffs for China to 125%
By Rafi Schwartz, The Week US
-
Why did Donald Trump U-turn on tariffs?
Today's Big Question President's 'easy-win' trade war couldn't survive the realities of the US economy
By Jamie Timson, The Week UK