02:30 - Source: CNN Business
Is a currency war coming?
Washington CNN  — 

President Donald Trump’s trade war just got more complicated – and it’s far from clear whether he’ll win a deal before American voters head to the polls next November.

Trump has become increasingly frustrated by a serious lack of progress on the China trade talks after believing he’d made progress in his meeting with Chinese President Xi Jinping on the sidelines of the G20 leaders summit in Osaka, Japan, according to multiple officials familiar with Trump’s thinking. Since then, the President and others have grown more pessimistic over the past week that a trade deal isn’t possible in the near-term, and Trump has acted against the advice of key economic advisers.

Trump surprised both China and investors last week by threatening to apply a 10% tariff on $300 billion of goods on September 1, and then swiftly retaliated by labeling the country a currency manipulator on Monday after Beijing said it would halt purchases of American farm products and allowed its currency to weaken.

“Somebody had to do this with China because they are taking hundreds of billions of dollars a year out of the United States and somebody had to make a stand,” Trump told reporters as he departed for Dayton, Ohio. “And I think our country is doing very well.”

US financial markets continued to shed losses with the Dow falling more than 550 points, or 2.1%, at the opening of Wednesday’s trading day.

Trump shrugged off this week’s market volatility as he spoke to reporters, saying it was “anticipated” and he had expected “even more.”

“But ultimately it’s going to go much higher than it ever would have gone because China was like an anchor on us, China was killing us with unfair trade deal,” he said.

The decision by the President to label China a currency manipulator came months after top economic advisers, including Treasury Secretary Steven Mnuchin and his former adviser Gary Cohn, repeatedly tried to talk Trump out of the provocation, arguing it could be more harmful in the long run.

The political challenge for Trump now is keeping his 2016 campaign promise to beat China while at the same time risking undermining his own economy and record-setting stock market, his favorite measuring barometer of his presidency.

“He now faces this dilemma that these actions against China, and other partners, are bad for the US economy, bad for the global economy,” said David Dollar, a former Treasury Department official who is now at the Brookings Institution.

“It could get a lot of worse and that has a big effect on reelection prospects for an incumbent president,” Dollar said. “On the other hand, he promised to get very tough on China.”

Goldman Sachs warned clients this week that a trade agreement “now looks far off” because officials in Washington and Beijing are “taking a harder line.”

“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 reelection prospects,” Goldman Sachs’ chief economist wrote in the report, “we are now less confident that this is his view.”

The Chinese central bank on Tuesday sharply opposed Trump’s declaration, arguing the United States will “ultimately suffer” from the decision and it would trigger additional financial market turmoil and the global economy recovery. “The Chinese side advised the US to rein in at the brink and return to the correct track of rationality and objectivity,” according to a statement from the People’s Bank of China.

Larry Kudlow, Trump’s top economic adviser, tried on Tuesday to send an assuring message to markets, telling reporters that the door is “open for additional negotiations with China.” He said the administration is still planning a meeting with Chinese trade negotiators at the White House in September.

Trump’s aggressive strategy to heap on billions and billions of tariffs to pressure China to the negotiating table has already showed signs of a slowing US economy, and around the world, as businesses have sat on the sidelines reluctant to make investments and purchases due to persistent uncertainty.

Even so, economists say, the President appears to betting on the fact he has some insurance that the Federal Reserve will continue to cut rates to avoid the economy running to cool and that a two-year budget deal will boost spending significantly to help stimulate the US economy as he heads into the 2020 election.

“He’s taking a big risk,” said Maurice Obstfeld, an economics professor at the University of California, Berkeley, and a senior fellow at the Peterson Institute. “He’s gambling that the economy is strong enough and the Fed will be reactive enough that he can wage these commercial and currency wars and come out a winner without damaging the economy too much but he may be kidding himself.”

China stalling?

After declaring in March 2018 that “trade wars are good and easy to win,” Trump opened the door late last month – publicly acknowledging for the first time - that China most likely will slow walk cutting any deal until after the 2020 election, speculating they’ll want to wait and see the outcome first.

And so far, China appears to be more willing to absorb more economic pain instead of appearing to cave to Trump’s demands as it looks to strategically play a long game that will likely outlast even a second presidential term of the former New York real estate mogul.

“He’s absolutely right that the Chinese are trying to stall until after the election,” said Derek Scissors, a China expert at conservative think tank American Enterprise Institute, who has occasionally advised the Trump administration.

“Absolutely right,” Scissors added. “They are open about it in private conversations. Their story is they don’t think he’s a reliable trade partner.”

Aggressive strategy

As a candidate – and even now as President – Trump has sought to portray himself as the country’s top executive who can win the best deals and will fight to protect the best interest for the country. But both those aims have often been at odds with each other as he has worked to strike a deal with Xi, who is facing his own domestic pressure now to bow to US demands.

Trump has repeatedly ripped up the usual Washington playbook in favor of a more unorthodox approach when it comes to his economic policy, especially on trade.

In May, he made the unexpected decision to abandon talks and threaten tariffs on China after negotiators changed the landscape, capsizing the confidence that policymakers, let alone markets and investors, could confidently predict the future.

“What he’s doing is trying to create the image of a President who is battling foreign foes to protect the US economy, particularly the trading manufacturing sector,” said Obstfeld. “This is sort of his political persona to be a fighter on the trade front.”

CNN’s Kaitlan Collins and Kevin Liptak contributed to this report.