Economic War?

Last week I commented on the possible trade war between the U.S. and China ... see: Soybeans and  Trade War? for some perspective on this pissing contest. Since these mentioned events, Trump has pushed more chips on the table threatening to add another $100 billion of new tariffs to the bundle. China has not responded with more threatened tariffs ... probably because they might be running out of  U.S. products to punish. So China has shifted its focus from tariffs and is now threatening to devalue its yuan in order to keep its mercantile edge in trading with the U.S. ... see: Bloomberg Article.

Now this currency threat tells me a few things:

- China realizes that it cannot win this trade war with tariffs alone. So, it  might have to escalate things to an economic war using its currency. This would dash its hopes of making the yuan an international currency of trade.

- Although China might devalue the yuan just relative to the dollar, the dollar is a powerful arbitration unit in international commerce ... meaning most of the rest of the world would be adversely affected ... not something China may want to do.

- The U.S. Is not likely to respond in kind to such a currency devaluation which would further besmitch the almighty dollar. But we do have other arrows in our quiver in such an economic war. One of which might be to reduce our interest payments on the $1.3 trillion of our debt by the degree of China's currency devaluation. After all such a devaluation by China artificially increases its local currency benefit of America's interest payments. This would, of course, reduce the value of this treasury hoard that China holds.

- The U.S. might adjust any threatened tariffs upward to compensate for any yuan currency devaluation. This wold be difficult for China to respond  to.

And there are many other arrows: WTO sanctions, a coordinated international response to China's mercantilism, subsidies to U.S. industries affected by any trade or currency war, restrictions on Chinese investment in the U.S., etc., etc. This is a complex chess game being played by two very smart players. But the U.S. does have more experience playing this game (although it hasn't looked like we have utalized this edge until just recently.)