Trump’s war of words ratchets up trade tensions

The Trump administration’s potshots at German and Chinese currency “manipulation” fall well wide of the mark.

National Trade Council adviser Peter Navarro, right, and White House Chief of Staff Reince Priebus, centre, await President Donald Trump's signing three executive orders. (AP Photo/Evan Vucci)

The Trump administration’s war on everyone and everything continues to widen. Now Germany has joined China, Mexico and Japan in being labelled a currency manipulator by the US.

That’s despite the fact that Germany doesn’t actually have a currency of its own, having abandoned the Deutsche Mark a decade-and-a-half ago in favour of the euro.

Trump’s key adviser on trade, Peter Navarro, head of the new US National Trade Council, told the Financial Times yesterday that the euro was like an “implicit” Deutsche Mark whose grossly low valuation gave Germany an unfair advantage over its trading partners. The administration has repeatedly expressed its concern about Germany’s trade surplus with the US.

While Navarro was denouncing Germany, his president, Donald Trump was attacking Japan and China for devaluing their currencies.

“You look at what China’s doing; you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies,’’ he told a group of pharmaceutical company executives.

The US dollar fell and the euro and yen strengthened as the administration’s comments, which add to the growing concerns about trade tensions and the unconventional and confrontational style of the new administration continues to unsettle markets.

Had Navarro targeted the European Union, and more particularly, the European Central Bank, his comments might have been better founded.

The euro is relatively weak because the eurozone economy, as a whole, is weak and pursuing monetary policies with negative policy rates and large-scale bond and mortgage buying — the same type of monetary policies that the US itself was pursuing until relatively recently — that inevitably depress the value of its currency.

While there is a reasonable view that the weakness of the euro gives German exports an advantage, within the eurozone and in global markets, it isn’t an advantage the German’s have actually pursued. The Germans have been the most vocal and aggressive critics of the ECB’s policies, consistently calling for an end to its asset purchases and an increase in official interest rates.

While there’s little doubt that if Germany did have its own currency and pursued its own monetary policies — if the Deutsche Mark were reinstated — it would be trading with a significantly stronger and less competitive currency, the biggest beneficiaries of a new Deutsche Mark would be the rest of the eurozone, which would become significantly more competitive as the euro depreciated.

Targeting the Germans, however, is akin to saying that California has an unfair advantage in international trade because the US dollar has a lower value than if the state had its own currency.

Similarly, the consistent criticism of China as a currency manipulator is based on an erroneous perception, or at least an outdated one, of what China has done and is doing.

Over the last year-and-a-half China has chewed through more than $US1 trillion — about a quarter — of its foreign currency reserves. It’s done that, along with other measures restricting capital flows, not to depress the value of its currency but to try to slow the rate at which it has been depreciating.

China is in the midst of an attempt to reorient its economy from its previous export-led growth model to one whose core is domestic consumption. That implies a desire for a stronger rather than weaker yuan.

The underlying reality of the currency relativities is that they reflect the fact that the eurozone and Japanese economies are weak and that China’s growth rate is weakening, while the US economy, which has been growing at a respectable level is strengthening and, if Trump’s can implement his economic agenda, will accelerate.

Divergent monetary policies that reflect the state of the various economies — the unconventional policies of Europe and Japan and the stimulus China injected into its economy last year — are responses to the condition of the real economies.

With rates so low in the eurozone and Japan, and the growth rate in China slowing even as concerns about the vulnerability of its financial system rise, it is quite rational that capital should flow towards the US and push up the value of the dollar.

In the eurozone, at least, there are some signs of light on the horizon. This week’s eurozone economic data showed both economic growth and inflation rising. The December quarter GDP growth of 0.5 per cent and inflation rate of 1.8 per cent will strengthen Germany’s arguments for the ECB to wind down its bond buying and to lift its policy rates.

That said, the eurozone unemployment rate is still close to 10 per cent and Germany’s, while a record post-unification low, was 5.9 per cent in January. The US unemployment rate is 4.7 per cent.

It isn’t helpful when Trump administration officials make these unpredictable “shoot from the lip” types of simplistic comments on what are quite complex, multi-layered issues.

It is also disconcerting that while Trump and his inner circle complain about the strength of the US dollar and the consequent inability of its companies to compete fairly, they are pursuing an economic and trade agenda that they must surely realise will inevitably lead to an even stronger dollar.

While happy to point to the post-election surge in the US stock market (until the past week) as an endorsement of the administration’s agenda, it also reflects a flow of capital towards the US, and demand for the US dollar, as a result of the pro-growth, “America First” policies they espouse.

The prospects of a trade war and increased geopolitical tensions are rising almost on a daily basis.

Among Navarro’s other comments yesterday was a statement that one of the administration’s priorities was the unwinding and re-domiciling of the international supply chains that connect to the US economy, saying it did the US economy no good to only keep the big box factories that assemble products that were primarily comprised of foreign components.

The disruption to global trade and the global economy — and the US economy — if the administration coerces US companies to make in America what they sell in America would be immense, with impossible-to-predict but almost inevitably ruinous consequences for the global economy that the US, whether the administration likes it or not, is a fundamental part of.