Day -46: Trump Doesn’t Understand Current Chinese Economics

China had previously — as in a decade and more ago — artificially tied the yuan to the dollar. The idea was that where the dollar went, so went the yuan. If the dollar did well, so did the yuan; if the dollar did poorer, it was an artificial limitation on the yuan that could be lifted at anytime.

But China hasn’t done that since the mid-2000s when the yuan really began performing well globally. This year, however, the yuan continued to perform poorly compared to the dollar, but China did not see the corresponding bump in production that Trump is indicating in his tweets.

(The idea is that if $1 = 6000 yuan in Year 1, and it costs $20 to make something in America, but 120,000 yuan to make it in China, the costs are the same. But if $1 = 7000 yuan in Year 2, that same 120,000 yuan now equals only $17.14. Thus, in Year 2, all things being equal, it’d be cheaper to buy the good in China. That’s the reason a nation would he incentivized to devalue their own currency.)

As the world shrinks due to globalization, and more countries come to the table with a competitive edge, the ability to artificially devalue their currency against a single country, no matter the size, matters less and less. That’s part of the reason China has largely ceased doing so.

What China used to do to America, other countries can now do to China. So devaluing one's currency has ramifications down the food chain.

As a whole, American currency is soaring compared to the other major currencies, up 35 percent since 2011. As Business Insider concludes:

Now that the tide of capital has reversed, nobody wants yuan: not foreign firms, not FX punters and not the Chinese holding massive quantities of depreciating yuan.

That’s the other side of it: less and less people want to get paid in yuan or want to have yuan. The American dollar has been king for scores and continues to be so.

While China created a system where it was great to buy goods with yuan, no one actually wants to hold the yuan for very long, turning one problem into another.

Donald Trump is right about one thing, though: if China taxes goods coming from the U.S., then the U.S. should tax goods coming from China. Trade deals, tariffs, federal and state laws and diplomacy all mix together on this kind of stuff, and Trump needs to spend the next few weeks and months really boning up on the nuances of these issues.

As for the underlying Chinese economics, his information is severely outdated.

46 days in, 1507 to go

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