Trump hurts the euro more than the renminbi

The currency world is preparing for trade measures that Donald Trump wants to introduce. Although he mainly targets China, it seems that this country is better able to absorb a trade shock than the eurozone

In the run-up to the election, Trump once remarked that "import tariff" is the most beautiful word in the dictionary. After taking office, he plans to impose a 10% to 20% tariff on goods and services from all trading partners. China must even fear a 60% tariff. The way in which Trump is putting together his cabinet suggests that he will make good on his threats when he enters the White House on January 20. Robert Lighthizer has reportedly already been sounded out for a high position. He was the architect of the trade measures against China during the first Trump administration.

China learns the lesson of 2018
On paper, China has the most to fear from the upcoming trade measures. There are two reasons why the blow will hit Europe harder. Firstly, China already gained experience in 2018 with the introduction of high trade tariffs. The country has probably already drawn up a whole package of measures to absorb the economic impact of the trade restrictions. To prevent this from being seen as provocation, this response will only be unfolded 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 is taking a beating
A second reason why the blow to the eurozone is hitting harder is because the region is an important sales market for Chinese products that will not end up in the United States. This effect is likely to be more pronounced than during the previous trade war. In recent years, China has made considerable efficiency and innovation progress. Electric mid-range cars from the country are much cheaper than the models built by German, French and Spanish car manufacturers. European industry is sidelined and the trade deficit with China could increase considerably in this scenario.

Chinese plans can be put on hold
The dollar has risen by more than 3% against the euro and by less than 2% against the renminbi since the US elections. The fall of the latter currency is limited because traders know that the Chinese central bank will not allow its own currency to fall too quickly. In addition to a stable exchange rate, policymakers are also aiming for a greater position for the renminbi in trade and as a reserve currency. With the prospect of a new trade war that could eventually lead to a currency war, these plans will probably have to be put on hold for a while. But that is probably less painful than the blow that the European economy and the euro are in for.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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