The Trump administration appears to be caught up in a self-defeating dynamic on the trade front and the more they try to wrestle their way out of it, the worse it seems to get.
The dollar had its best day in a week on Thursday following the Fed’s upbeat take on the economy (the August statement seemingly cements a September hike) and amid comments from Wilbur Ross that suggest the trade tensions are likely to get worse before they get better.
“The reason for the tariffs to begin with was to get China to modify their behavior,” Ross told Fox’s Maria Bartiromo, before pretending to be surprised that Beijing is protecting its interests. “But instead they have been retaliating”, Wilbur lamented, adding that due to China’s reluctance to roll over in the face of pressure from Washington, “the president feels that it is potentially time to put more pressure on in order to modify their behavior.” The absurdity inherent in talking about Xi Jinping like he’s a toddler whose “behavior” can be “modified” was apparently lost on the vaunted commerce secretary.
Ross was of course referring to the prospect of the administration hiking the proposed tariff rate on an additional $200 billion in Chinese goods to 25% from 10%. News that Trump is considering such a move leaked out on Tuesday, was confirmed on Wednesday afternoon and rippled across foreign equities on Thursday.
The problem here for the Trump administration is that each new escalation stokes fresh market fears about further yuan depreciation. The PBoC has so far countenanced the yuan’s declines, successfully negating the effects of the first two rounds of U.S. tariffs before the duties have even been fully implemented. Up to and until there are convincing signs that the rapid depreciation in the currency is leading to capital flight, there’s no incentive for Beijing to intervene.
The offshore yuan is now within spitting distance of its all-time low of 6.9895 and barring more in the way of aggressive weak dollar rhetoric from Trump’s Twitter account, there doesn’t seem to be any end in sight here.
Documenting this on a daily basis is maddening – full stop. And the reason it’s so maddening is that it’s still not clear whether Donald Trump really understands the extent to which his policies are working at cross purposes with one another. The President continues to mash the gas when it comes to the domestic economy even as it’s hitting on all cylinders. That leaves the Fed with no choice but to acknowledge that strength and continually insist that the proper course for U.S. monetary policy is more (if gradual) rate hikes. That means that even if China weren’t easing (which they are, via a dizzying array of tools), the policy divergence with the Fed would be slowly growing, making the case for a stronger dollar and thereby watering down the tariffs.
It’s not that Trump shouldn’t be pleased with good economic data – he should. But the least he could do, if he wants to make it easier on the Fed when it comes to pausing the hiking cycle, is not hold nationally televised press conferences on the White House lawn to celebrate quarterly GDP data.
Take a step back and think about what he’s doing. He is demanding dovish monetary policy (literally, on CNBC and on Twitter) while simultaneously bragging about how he’s deliberately overheating the economy. This is right out of the banana republic playbook.
Instead of acknowledging the self-referential nature of this Third World economic insanity loop, his three-pronged “solution” is to i) insist that America’s trade partners not reciprocate when he slaps tariffs on their exports, ii) implicitly demand they raise rates in order to help him keep the dollar from appreciating too much, and in the final insult, iii) dispatch his octogenarian commerce secretary to accuse other countries of “misbehaving” when they refuse to acquiesce to this farce.