Director of Client Relationships Responsible for the management & development of the easyMarkets client base as well the development of our IB partner program.

U.S. President Donald Trump has made it abundantly clear that Washington will no longer be on the losing end of trade deals. Shortly after inauguration, the president issued multiple executive orders withdrawing the United States from the Trans-Pacific Partnership (TPP) and vowing to renegotiate the North American Free Trade Agreement (NAFTA), which has governed trade relations between the U.S., Canada and Mexico since 1994.

Behind these executive orders is a desire to curb globalization, or at the very least, get it to work for U.S. interests. Nowhere has this been more apparent than in Trump’s stance toward China, the world’s second-largest economy.

Unfortunately, Trump’s protectionist agenda comes at a time when the U.S. depends on countries like China more than ever before. As this relationship faces new hurdles, many investors believe there’s not much left stopping an all-out trade war with China. And Beijing has shown it is up for the challenge.

U.S. Dollar “Too Strong”

Trump has voiced his displeasure about Chinese trade policy long before winning the White House. However, since becoming president, his words naturally carry more weight, as investors try to piece together his plan for the economy. This was evident last month when Trump told The Wall Street Journal the dollar was “too strong” against its global peers, partly because China continues to devalue its currency, the yuan renminbi.[1]

Trump’s comments were partly responsible for sending the U.S. dollar to three-month lows against a basket of other major currencies, virtually erasing all the gains made since the November 8 election.

Trump is not entirely wrong about the dollar-yuan (USD/CNY) relationship. The yuan, which is a pegged currency that is not permitted to float freely on the open market, declined nearly 7% against the dollar in 2016, and at one point plummeted to an eight-year low.[2] A weaker yuan makes Chinese exports more competitive, the very thing President Trump is concerned about.

China Takes the Mantle of Globalization

Any doubt about China’s ambition to expand globalization was effectively erased at last month’s World Economic Forum in Davos, where President Xi Jinping defended globalization and warned against trade wars.

“No one would emerge as a winner in a global trade war,” Xi said. “Pursuing protectionism is just like locking one’s self in a dark room. Wind and rain might be kept outside but so are light and air.”[3]

However, it seems like the new U.S. administration has already made up its mind. Trump sees a zero-sum competition between the United States and other trade partners. For that reason, he has sought to re-negotiate existing deals and reach out to specific countries for bilateral trade. Trump also perceives China as having more to lose from a trade war, since the United States runs a large trade deficit with Beijing. Having already threatened to slap Chinese imports with a 45% tax,[4] Trump’s protectionist path could end 20-plus years of U.S. policy toward the far east – one that was based on the idea that economic relations with China had great promise.[5]

Trade War to Have Major Consequences for U.S.?

Experts aren’t convinced that Trump will succeed in trade war against China. For starters, China is much stronger economically than it was 20 years ago. It has most of what it needs and can easily make up the difference from countries outside the U.S. China is also witnessing growing demand for its products from emerging markets, such as India and Latin America. These regions are consuming Chinese-made electronics at a faster rate, giving Beijing plenty of options for tapping into diverse end markets.

Trump also needs to consider that China now has the world’s biggest middle class,[6] one that is consuming American-made products at an accelerated pace. By the end of 2015, Chinese consumers had already purchased 131 million iPhones, outpacing U.S. sales for the same product. From e-commerce solutions to Boeing airplanes, China is expected to be a much larger market over the next several decades.[7] This feeds into Beijing’s ambition to transition China’s economy from exports and investment toward consumption and services.

Therefore, the immediate casualties of a trade war may be U.S. multinationals like Wal-Mart, which rely on Chinese production to deliver affordable goods to the same people who voted for Trump in November.

The global establishment has also made it clear that it does not support Trump’s protectionist policies. This could further play into the hands of China, which has embraced globalization at almost every turn.

Let’s also not forget that stubbornly high U.S. dollar. As the Federal Reserve – an independent authority that is not bound by Trump’s decisions – continues to raise interest rates, the dollar is expected to appreciate even further. This paints a very negative picture for Trump’s protectionist ambitions.

[1] Shuli Ren (January 17, 2017). “Trump: Dollar Is “Too Strong” And “It’s Killing Us.” Barron’s.

[2] Scott Cendrowski (November 15, 2016). “China’s Yuan Just Sunk to an 8-year Low Against the Dollar.” Fortune.

[3] Matt Clinch (January 17, 2017). “China President Xi Jinping: ‘No one will emerge as a winner in a trade war’.” CNBC.

[4] Winter Nie (February 6, 2017). “The US would lose a trade war with China, ‘bigly’.” The Hill.

[5] Dan Ikenson (February 6, 2017). “Not Much Left Stopping Trump’s Trade War With China.” Forbes.

[6] Telegraph (October 14, 2015). “China’s middle class overtakes US as largest in the world.”

[7] Winter Nie (February 6, 2017). “The US would lose a trade war with China, ‘bigly’.” The Hill.

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