China’s Trump Dilemma
The High Stakes of Decoupling from the Dollar
With Donald Trump back in the White House, the high tariffs he has pledged to slap on Chinese imports are not China’s greatest concern. China’s leaders understand that tariffs are more significant for Trump as political and symbolic moves than as economic weapons that will seriously impede China’s growth and development.
The Real Dilemma: Decoupling from the Dollar
The real dilemma facing China centers on whether or not to decouple its economy from the dollar-dominated international monetary system by turning the BRICS (Brazil, Russia, India, China, South Africa, and five new members) group of major emerging economies into a Bretton-Woods-type arrangement.
A Difficult Trilemma
Trump is facing a difficult trilemma: Can he combine high tariffs, a weaker dollar, and the greenback’s continued global hegemony? Having studied the 1985 Plaza Accord carefully, Chinese leaders anticipate that Trump will try to do to them what Ronald Reagan did to the Japanese 40 years ago.
China’s Options
China can choose its poison: a massive appreciation of the renminbi or massive tariffs on Chinese imports. But this brings us to the political and geostrategic dimension of the problem.
Why China Won’t Back Down
Trump understands that China is not Japan, whose postwar constitution was written by US officials and a country where 55,000 US military personnel are stationed. Moreover, China is no longer as dependent on the US market as it used to be, having diversified and made its products and fully-owned supply chains indispensable worldwide. The chance that China will roll over and accept sharp renminbi appreciation to avoid Trump’s tariffs is vanishingly small, to put it mildly. Chinese officials know very well that the revaluation of the yen under the Plaza Accord was instrumental in permanently derailing Japan’s industrial and financial ascendancy.
The Consequences of Decoupling
If China does not revalue the renminbi, it can still benefit from the appreciation of other emerging market currencies, such as the Indian rupee or the Brazilian real. This would create an opportunity for a more balanced international monetary system, where the renminbi could play a stabilizing role, much like the US dollar did in the 1950s and 1960s.
Conclusion
In conclusion, China’s Trump dilemma is not about tariffs but about whether to decouple its economy from the dollar-dominated international monetary system. The answer will depend on geopolitics, not economics. Will China take the giant step of making its surpluses available to BRICS to create a quasi-fixed rate for the renminbi, or will it remain within the broader dollar system and play for time until the US internal contradictions play out?
Frequently Asked Questions
Q: What is the BRICS group?
A: BRICS is a group of five major emerging economies: Brazil, Russia, India, China, and South Africa.
Q: What is the Bretton-Woods system?
A: The Bretton-Woods system was a monetary order established in 1944, which linked currencies to the US dollar and pegged them to a fixed rate.
Q: What is the Plaza Accord?
A: The Plaza Accord was an agreement signed in 1985 between the US, Japan, and several European countries to devalue the US dollar and revalue the Japanese yen.
Q: Who is Yanis Varoufakis?
A: Yanis Varoufakis is a former finance minister of Greece and professor of economics at the University of Athens. He is the leader of the MeRA25 party.
Q: What is the MeRA25 party?
A: The MeRA25 party is a left-wing political party in Greece, founded by Yanis Varoufakis in 2020.