Opinion Joost Derks
Trump does more harm to the euro than the renminbi
The currency world is preparing for trade measures that Donald Trump is planning to implement. Although he mainly targets China, it seems that this country is better equipped to absorb a trade shock than the eurozone
In the run-up to the elections, Trump once mentioned that 'import duty' is the most beautiful word in the dictionary. He plans to introduce a duty of 10% to 20% on goods and services from all trading partners after taking office. China may even fear a rate of 60%. The way Trump is assembling his cabinet suggests that he will fulfill his threats when he enters the White House on January 20. Robert Lighthizer is rumored to have been approached for a high position. He was the architect of the trade measures against China during Trump's first term.
China learns the lesson from 2018
On paper, China has the most to fear from the upcoming trade measures. There are two reasons why the blow in Europe will still hit harder. Firstly, China gained experience in 2018 with the introduction of high trade tariffs. The country has likely already prepared a whole package of measures to offset the economic impact of trade restrictions. To prevent this from being seen as a provocation, this response will only be unveiled when Trump makes the first move. Europe will then have to go back to the drawing board to find an appropriate response to the American measures.
European industry will suffer
A second reason why the blow in the eurozone will hit harder is that the region is an important market for Chinese products that will not end up in the United States. This effect is likely to have a greater impact than during the previous trade war. In recent years, China has made significant efficiency and innovation strides. Electric mid-range cars from the country are much cheaper than the models built by German, French, and Spanish carmakers. The European industry will be sidelined, and the trade deficit with China could increase significantly in this scenario.
Chinese plans may be put on hold
Since the U.S. elections, the dollar has risen by over 3% against the euro and by less than 2% compared to the renminbi. The decline of the latter currency is limited because traders know that the Chinese central bank will not let its own currency fall too quickly. In addition to a stable exchange rate, policymakers are also aiming for a larger role for the renminbi in trade and as a reserve currency. With the prospect of a new trade war that may eventually lead to a currency war, those plans may need to be put on hold for now. But that is likely to be less painful than the blow awaiting the European economy and the euro.
Joost Derks
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