History tells us that big movements in financial markets are difficult to predict, but when they come they happen very quickly. That is what we have seen over the past several days, as investors around the world have responded to a sudden escalation in the trade war between the world’s two largest economies, the United States and China, and the growing realization that at least one of these economies is being led by someone who doesn’t appear to understand the risks he is taking.
After posting their biggest decline of the year on Monday—a slide of three per cent—U.S. stocks rebounded somewhat on Tuesday morning. The modest rebound came after the the Chinese central bank signalled that, for now at least, it wouldn’t allow another decline in the value of the Chinese currency, the yuan. Monday’s big fall on Wall Street came after the yuan fell almost two per cent on that day, and Chinese officials suggested that the decline was a response to President Trump’s decision, last week, to broaden tariffs on Chinese goods. In a further escalation, the Trump Administration announced, on Monday evening, that it was designating China as a currency manipulator, a move that Trump signalled on Twitter by accusing the Chinese government of “trying to steal our businesses and factories.” (A lower value of the yuan makes Chinese exports more competitive.)
The trade dispute between the U.S. and China has been rumbling along ever since Trump took office, of course, and many Chinese exports to the U.S. are already facing Trump-imposed tariffs. But this whirlwind of escalation came without any warning, and it fuelled fears that events are spiralling out of control. “The US Treasury’s designation of China as a currency manipulator signals that the trade war is expanding into an all-out and open economic warfare between the two countries,” Eswar Prasad, a Cornell University economist and expert on China, told the Financial Times. Posting on Twitter, Lawrence Summers, the Harvard economist who served as the director of the National Economic Council during the first Obama Administration, warned, “We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China.”
View the complete August 6 article by John Cassidy on The New Yorker website here.