What Are the Long-Term Costs of the China-US Trade War?

Dark times loom for the US economy in the aftermath of President Donald Trump’s latest threat on August 1 to levy 10% tariffs on some $300 billion of imports from China. In response, China allowed the yuan to weaken against the dollar and thereby cushion the impact for Chinese exporters. In a tweet, Trump accused China of “currency manipulation” and called upon on the Federal Reserve to respond.

The yuan-dollar rate of 7-to-1 was at its lowest since 2008. “[The] trade war has now become a currency war, which raises the potential economic harm to another level,” The Wall Street Journal noted in an editorial. On August 5, the Dow Jones and the S&P indices fell 3% and stock markets and currencies in emerging markets weakened, and an economic downturn seemed closer than before. The spread between the 3-month and 10-year Treasury yields — an indicator of recessions — inverted to its widest level since 2007.

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