David Xia: China Can’t Depreciate Renminbi Any More to Offset US Tariffs

Ms. Gao: President Trump announced last week that he planned to raise tariffs from 10 percent to 25 percent on 200 billion dollars of Chinese goods. Last year, the Senate passed a 700 billion military budget bill, which was also a major deterrence to China’s ambitions. Do you think Mr. Trump’s strategy of maximum pressure will succeed? How would China respond?

Mr. Xia: Trump is now pressing really hard and not allowing China a break. Although China deployed a trick to let the Renminbi depreciate by 10 percent to cancel the effects of tariff increases, the U.S. made a new move to increase the tariffs to 25 percent, making it extremely difficult for China to further depreciate its currency correspondingly. Some calculated that if the Renminbi were to be devalued by 40 percent, 50 percent or even more, it’d then be possible for China to offset the impact of the 25 percent U.S. tariffs. In this scenario, a drastic depreciation of the Renminbi would bring serious inflation and bring stress and negative consequences to all aspects of the Chinese economy. So I believe China doesn’t have any strong hands left in playing with the value of the Renminbi. Most people would think that the Sino-U.S. trade war is limited to trade itself, and Trump’s main goal is to gain more financial interests for the U.S. In my humble opinion, however, it goes far beyond the economy and trade. Trump made it clear that he’d like to “Make America Great Again,” and his policies center around “America First.” It’d be natural for Mr. Trump to want to restore the United States as the beacon of the free world. His childhood idol was President Reagan because Mr. Reagan kept the Soviet Union in check during the Cold War. It appears to me that the trade war is a contemporary Cold War. The 44-year Cold War ended in 1991; the new Cold War just started. In the new Cold War, the U.S. will have a fundamental war of ideologies with its new rival, China. So I believe that Mr. Trump is not only looking after trade itself, he has long-term national interests and security in his mind.

 
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