My Take | Trumpian economics will hurt the world more than it will hurt China

What kind of wild and crazy trade policies does the incoming Donald Trump presidency have in store for China and the world?

Seasoned observers are already speculating his unorthodox economic team is preparing – this time for China – the 21st century version of the Plaza Accord, a deal that ruined Japan’s economy for several generations. Some Washington wit has already suggested calling it the Mar-a-Lago Accord.

It’s all part of an economic war. As usual, it’s China’s fault. In this telling, Beijing’s unfair manipulation of the yuan and exploitation of global trade has meant the “stealing” of American jobs and the hollowing out of US manufacturing. That, in turn, has turned the United States from the world’s biggest creditor into its largest debtor.

Then as now, America needed someone to blame. In the mid-1980s, that scapegoat was Japan, which was in a similar position to China today – a manufacturing powerhouse that enjoyed a big trade surplus with the US.

So Washington insisted on depreciating the US dollar – or rather having several leading currencies, especially the yen, strengthening – to reduce the country’s trade deficit with Japan, hence the Plaza Accord. The strengthened yen helped create the mother of all bubbles and we all know what happened next.

How will Plaza Accord 2.0 work against China? Well, tariffs. High tariffs tend to be inflationary, as US importers pass on the new costs to consumers. Investors and consumers don’t like inflation, and the Trump team knows it. So, what to do?

The Trump team is betting it won’t get to the inflationary stage as it brings about both the slashing of Chinese exports and weakening of the dollar. Tariffs alone may achieve the former but not the latter. For both to happen, China will have to, like Japan before it, appreciate its currency.