Tensions between the U.S. and China have been steadily escalating on a range of issues, but there’s one place where a clash of superpowers would be most likely to happen: the South China Sea. Even with a new U.S. president, the disagreements that led to this moment won’t be easy to resolve. So how did this body of water become a major flashpoint in U.S.-China relations?
Can America and China Avoid a Currency War?
Although the current poor state of Sino-American relations may make even a very limited currency détente unattainable, such a pact is not outside the realm of possibility. Ultimately, both America and China might see some advantage in taking currency conflict off the table, in the hope of preventing wider damage to themselves and others.
SANTA BARBARA – China’s currency, the renminbi, weakened slightly against the dollar at the start of this week. Around the world, the immediate response was panic. Financial markets tumbled, US President Donald Trump’s administration formally labeled China a currency manipulator, and fears of a new currency war spread like wildfire. To describe all this as an overreaction would be a gross understatement. A currency war has not erupted – at least, not yet.But the danger is real. Although markets now appear to be recovering somewhat, America and China remain locked in a perilous trade war with no end in sight. The United States is still poised to impose a 10% tariff on some $300 billion worth of Chinese imports. It does not seem unreasonable to suppose that China might then retaliate by engineering a substantial devaluation of its currency. After all, a cheaper renminbi would go a long way toward offsetting the impact of Trump’s tariffs on the prices of Chinese goods in the US.But, because devaluation would also carry significant risks for China, the country’s leaders will be hesitant to take this step. Many of China’s biggest enterprises have borrowed heavily in dollars, and a weaker renminbi would greatly increase the cost of servicing this external debt. Worse, the prospect of devaluation could spark massive capital flight from China as anxious companies and individuals seek to protect the value of their assets. That is what happened four years ago when the renminbi was allowed to weaken significantly, and the Chinese authorities subsequently had to spend $1 trillion in foreign-exchange reserves to prevent the currency from crashing.
It seems unlikely, therefore, that China is about to declare all-out currency war. What happened earlier this week was much subtler – in effect, a shot across America’s bow. The renminbi was already close to the symbolic level of CN¥7 per US dollar. By setting their daily benchmark rate for the currency at a smidgen below CN¥7, the Chinese authorities created room for currency traders to push the market rate temporarily above CN¥7 – an effective devaluation. Although the actual size of the devaluation was minuscule, the psychological impact was enormous. China was reminding America that it still has many economic arrows in its quiver.
Unfortunately, the Trump administration responded in typical blunderbuss fashion, mistaking the modest Chinese signal for something more sinister. By immediately declaring China a currency manipulator, the US succeeded only in hardening positions on both sides.
To avoid losing face, Chinese leaders may now feel compelled to respond in kind. They could make good on the threat of devaluation, or pull out some of its other arrows. For example, China could
- embargo exports of the rare earth minerals that are so vital to America’s tech industry, or prolong its
- boycott of US agricultural products. Or it could go beyond the realm of commerce and
- stir up trouble in the South China Sea or the Taiwan Strait. In short, relations between the world’s two largest economies could go from bad to much worse.
Can further escalation be avoided? One way to avoid that outcome might be to look to a neutral arbiter to adjudicate the currency issue. The most obvious candidate is the International Monetary Fund, one of whose main functions is to oversee the “rules of the game” in international monetary affairs. All Fund members have pledged to avoid exchange-rate manipulation, and all are formally subject to “firm” Fund surveillance of their currency policies. In principle, if America and China truly want to avoid a monetary conflict, they could ask the IMF to step in to settle matters.
In practice, however, the Fund’s authority is sadly limited. The IMF has no powers to enforce rulings. At best, all it can do is “name and shame” currency manipulators. And in the end, it is hard to imagine either America or China kowtowing to a toothless multilateral organization. Can anyone really picture Trump submitting to the judgment of a bunch of unaccountable international civil servants?
A slightly more realistic option might be a direct bargain between the US and Chinese governments – perhaps also including the European Central Bank and one or two other monetary powers – to achieve some form of currency détente.
There is precedent for such a deal. Back in 1936, following more than a half-decade of uncontrolled competitive devaluations during the Great vDepression, the main financial powers of the day – the US, Britain, and France – agreed to an informal arrangement for mutual exchange-rate stabilization. Jokingly called the “twenty-four-hour gold standard,” the Tripartite Agreement committed each country to give 24 hours’ notice of any change in its currency’s price. Though far from perfect, the pact did manage to restore some semblance of order to monetary affairs.
A similar agreement today would be more difficult to negotiate. In the 1930s, America, Britain, and France were on reasonably good terms. Present-day America and China, by contrast, are strategic adversaries engaged in a trade war, and even a very limited exchange-rate initiative might prove unattainable. Yet it is not outside the realm of possibility. Ultimately, both sides might see some advantage in taking currency conflict off the table, in the hope of preventing wider damage to themselves and others.
Philippines’ Duterte Says Chinese Leader Raised Threat of War Over South China Sea
Philippines President Rodrigo Duterte said his Chinese counterpart had threatened him that Beijing would “go to war” if Manila begins drilling for oil in the South China Sea.
.. “We do not want to quarrel with you. We want to maintain a warm relationship but if you force the issue we will go to war.”
.. Mr. Duterte has a record of inaccuracies and exaggeration.
Are You Not Alarmed?
Last week, Trump’s secretary of state nominee, Rex Tillerson, said during his confirmation hearing that the United States had to “send China a clear signal that, first, the island-building stops, and second, your access to those islands also is not going to be allowed.”
The only way to do this is with some sort of naval blockade, which China would undoubtedly interpret as an act of war.
.. Trump’s talk on trade alone could escalate into an armed conflict with China. Trump has said he will make continued adherence to the “one China” policy — which recognizes Beijing as the sole government of China — conditional on negotiations over what he sees as currency manipulation and other unfair trade practices by China.
.. during the campaign Trump suggested that the way to contain North Korea was for nuclear proliferation in the region. In March, Trump said of nuclear weapons: “You have so many countries already — China, Pakistan, you have so many countries, Russia — you have so many countries right now that have them.” He continued: “Now, wouldn’t you rather, in a certain sense, have Japan have nuclear weapons when North Korea has nuclear weapons?”
Then there is the destabilizing and downright frightening random rhetoric. Trump has suggested that he equally trusts America’s friend-in-arms Angela Merkel and his friend-in-spirit Vladimir Putin.
Trump told The Washington Post this week that he may start having military parades in major American cities à la North Korea: “Being a great president has to do with a lot of things, but one of them is being a great cheerleader for the country.” He continued: “And we’re going to show the people as we build up our military, we’re going to display our military. That military may come marching down Pennsylvania Avenue. That military may be flying over New York City and Washington, D.C., for parades. I mean, we’re going to be showing our military.”