August 22, 2019

Trade Wars Are Not Easy to Win

“Stocks plunged this afternoon in Wall Street’s worst day of the year, as the trade war between the United States and China entered a dangerous new phase that could imperil the historic U.S. recovery.

The Dow Jones Industrial Average and the S&P 500 both fell 3 percent. Oil crashed. The spread between three-month and 10-year Treasury rates—the “yield curve,” which has historically served as a prescient indicator of the economy—inverted to its widest level since 2007, the year the U.S. fell into the Great Recession.

In March 2018, the president declared that “trade wars are good, and easy to win.” Today was evidence that, in fact, they are neither.

The yuan, which is tightly controlled by the People’s Bank of China, dipped sharply and hit an all-time low in offshore trading—a dramatic escalation in the standoff between the White House and Beijing. But the currency depreciation isn’t just an omen. A cheaper yuan would also have an immediate effect on global trade, making Chinese exports more affordable, while reducing its demand for global goods and services—such as iPhones, oil, and tourism. The state-run Xinhua News Agency also announced that the Chinese firms would stop buying American agricultural goods entirely.”

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