Peter Navarro, along with Wilbur Ross, won the tariff debate. Dr. Navarro, a few years ago, wrote Death by China, where he lays out his arguments why the U.S. must confront China on trade, currency, business, and the rest.
And, to drive the point home, he also made a one hour and 20 minute long movie. The few seconds from the film, below, will give you the flavor of Dr. Navarro's thinking.
But, with the steel and aluminum tariffs, he seems to have missed his target. China doesn't export a lot of steel to the U.S., although by shipping through third countries, it does supply more than the official numbers indicate. You just can't trust Chinese data.
Whether you agree with the proposed tariffs or not, the tariffs have gotten the attention of the markets. Yet, one that hasn't received a lot of press is the currency market.
So, I invited experienced forex trader and markets expert Bob Savage, CEO of TRACK, to explain how the tariffs are affecting the currency market generally and China and Asia more specifically.
1. The 'Trump Risk Premium'
Bob Savage, CEO of TRACK, explains: 'The currency markets are embroiled in trying to figure out whether the Trump tariffs on steel and aluminum are good or bad for the U.S. economy and the U.S. stock market.'
'Just like other markets, in the foreign exchange context, the dollar already has a "Trump risk premium" built into it.'
- 'In forex terms, the "Trump risk premium" is measured by how much higher our real rate is than the rest of the world's.'
- 'The G7 real rate in Europe is negative, the G7 real rate for Japan is negative, but for the U.S., it's positive.'
- 'That indicates to me that no one has faith that we are going to pay our bills or that this president means what he says.'
'How much the U.S. president is supported abroad is a measure that we all want to try to correlate to how it affects markets.'
- 'The U.S. is a special case because we need about $400 to $500 billion of foreign money to fund ourselves.'
- 'Otherwise we have to do it internally, and that requires a shift in our savings mechanisms - we would have to force Americans to buy their own bonds.'
- 'Instead, we force other countries to buy our bonds.'
'The petrodollar argument of the 1970s is a classic example, where the difference between Trump and Reagan may well be in that recycling of U.S. dollars abroad.'
- 'Because we have big trade deficits, the money has always traditionally gone back to the United States in funding our budget deficits.'
- 'This is not the case when you have a negative view of U.S. growth and a negative view of how the world is going to react to U.S. deficits.'
2. Trump's tariffs: a coup China soft power
Bob Savage, CEO of TRACK, believes 'China's going to try to do a couple of things with the U.S. tariffs.'
'One is defensive - making sure that this doesn't hurt them competitively.'
- 'China doesn't officially import a lot of steel and aluminum to the U.S., But, its trading partners Korea and Japan do.'
- 'So, Korea and Japan could be tempted to make a traditional reaction to tariffs - devalue the currency. And, China will use its reserves to buy Yen and Won to head that off.'
- 'I note, though, that Korea and Japan's steel and aluminum exports to the U.S. aren't really big enough to justify devaluation, but the issue still needs examination. More later.'
'Two is public relations - using the tariffs to try to win the mantle of the good player in Asia and the international arena, to show that they're not retaliatory and reactive to U.S. noise, but instead very thoughtful, and plodding, and fair in their way. All to the U.S.'s disadvantage.'
- 'In Asia, China has already been working to position itself as the 'good player,' as, for example, becoming, the go-to provider for capital in emerging markets, expanding the One Belt One Road and their new infrastructure plans there, and so on.'
'All this certainly is putting Asia in a tight spot.'
- 'They don't feel that the U.S. is offering them anything.'
- 'They don't feel like China is perhaps the right player to go to, but it might be the only choice.'
- 'If I'm reading Beijing correctly, the leadership in China would like to offer Asia and the world an alternative to U.S. hegemony to Trump's madness. And, the tariffs play right into China's hand.'
3. The RMB-Yen & RMB-Won relationship...it's complicated
Bob Savage, CEO of TRACK, says: 'When it comes to Asia, these tariffs are really difficult to put your head around, because they affect Korea, they affect Japan, and their trade relations with China are incredibly important.'
- 'Therefore, I'm looking at how the Renminbi-Yen and Renminbi-Won relationships trade.'
- 'Especially, how China manages the Won and Yen to the Renminbi, and whether this is its preparation for a harsher game ahead.'
'If you look at the chart of Won and Yen, below, they've broken out.'
- 'The Yen is considerably stronger. If you were just trading this on a technical basis, if you were going, "I want to be long Yen and short Renminbi."
- ''Korea is not quite the same game, but it certainly is no longer a game where Korea gets a free pass because of North Korean worries or a new government.'
'Both of those countries need to see that they can't competitively devalue to gain any market share at all.'
'In this case, Japan and Korea wouldn't want to devalue anyway because steel isn't a huge part of their export path. It's really about autos.'
'But, it makes a point here about the traditional way of dealing with tariffs, and this is the key point: what do tariffs really mean? How do you deal with a tariff, if you're a country? There's two ways.'
- 'One is you substitute a product.'
'Or, two, you devalue your currency to make up for the tariff.
- 'Here's what I mean. I'm in Japan, and I get slapped with a 25% steel tariff, and my steel happens to be (but, in fact, is not) what is in demand for high-end products, and the United States is using it.'
- 'Well, then you're going to try to devalue the currency to give your companies a competitive advantage to make up for the disadvantage of the tariff.'
- 'But, now it looks like that game isn't going to work.'
'The reason why devaluations probably don't work for emerging markets or the G7 currencies this time around is that China is going to be able to use its reserves to buy those currencies and prevent them from weakening too quickly.'
- 'We've seen China this year actively buying Korean Won and Japanese Yen along with the euro. This was originally taken as a sign of China's displeasure with holding U.S. assets'
- 'But, it is also a larger game of trying to live in a world where China is trying to manage its currency and how it trades against a 24 other currencies.'
'In this case, Japan and Korea are being told by China, "You're no longer going to be given a free ride to devalue when you have an economic hiccup," because it has an immediate impact upon China.'