A perfect storm may be brewing

Columns

Published: 13 Aug. 2019, 20:13

A perfect storm may be brewing

Choi Byung-il
The author, a professor at Ewha Womans University Graduate School of International Studies, is president of the Korea Economic Research Institute (KERI).

The trade war between the United States and China has entered a new phase as the U.S. government under President Donald Trump labeled China a “currency manipulator.” The tariff war between the two has expanded to the currency front and the global economy has tensed up on the ramifications of the game of chicken between the world’s two largest economies.

Since his campaign three years ago, Trump has warned of branding China as a currency manipulator. Washington did not give it that label as Beijing dexterously circumvented the three requirements for being classified as such: a trade surplus with the United States; a surplus in the current-account balance; and government intervention in the foreign exchange markets. The United States has resorted to the somewhat subjective Omnibus and Competitiveness Act to designate China a currency manipulator.

Using the currency card is a typical Trump deal-making move, raising the stakes to draw greater concessions from the other party. The stake-raising move may suggest Trumps’ frustration with the way China reacts to his attacks.

Beijing did not yield to the United States’ pressure despite its repeated tariff hikes and sanctions on Chinese technology companies. China’s guerrilla-style resistance from Mao Zedong days may, in fact, be wearing Trump out. Beijing refused to continue to negotiate “with a gun pointed at its head.” “We are not China of the 1840 Opium Wars anymore,” it declared. The more Trump bullies, the more proud and determined Beijing becomes. China finally stopped importing American farm goods from the Midwest, a core voting base of Trump. Last week, the Chinese central bank also took the action of devaluing the yuan under the psychological Marginot Line of seven yuan against the dollar.

U.S. President Donald Trump and Chinese President Xi Jinping meet at the G-20 summit in Osaka, Japan, June 29, to discuss resumption of trade talks. [REUTERS/YONHAP]

Trump may be envisioning turning the clock back to the 1980s when the United States stopped Japan’s ascension by rounding up other western powers to enforce appreciation in the Japanese currency through the Plaza Accord. Tokyo could not stake losing the United States market or military alliance. But China is no Japan. Beijing, which has been building up its military as well, won’t back down in the struggle with the United States.

The Sino-U.S. currency war won’t stop unless Beijing promises not to weaken the yuan. From Sept. 1, the United States will levy 10 percent on the rest of Chinese imports. It will push up the tariff rates to 25 percent and even higher until Beijing throws in the towel.

If the trade war that enjoyed a short truce since December expands further, the outlook for the global economy for the rest of the year and next year is uncertain. There may be no end in the tunnel, with panic expected to weigh over markets and economies around the world.

The Korean markets are particularly sensitive to currency shocks after their traumatic experience with the Asian currency crisis in late 1997, which eventually led the country to seek a bailout. The Korean won plunged below the 1,200 mark against the dollar after the Sino-U.S. currency war broke out. With the economy heavily reliant on external trade and its markets susceptible to speculative forces, a perfect storm may be brewing.

Financial authorities simply repeat the mantra that Korea’s fundamentals are strong. But the passengers on the ship worry about the overly optimistic captain.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Aug. 13, Page 29