After Donald Trump returned to the White House, the biggest concern for Chinese leaders is not the announced high tariffs on Chinese products. They know that the tariff increase is more important to Trump as a political and symbolic act than as an economic weapon that could actually threaten China's economic growth and prosperity.

The main dilemma facing China at this point is whether it should be excluded from the dollar-dominated international monetary system, so that the still-forming grouping of major global economies known as BRICS will transform it into a Bretton Woods-like arrangement. The answer to that question depends not on tariffs or the fate of TikTok, but on whether the hawks in the Trump administration can provoke a confrontation that goes beyond tariffs and into the realm of financial sanctions.

As a weapon to subdue China, tariffs are overrated, especially when combined with promised tax breaks and radical deregulation. These are moves that are likely to boost U.S. profits and stock prices, spurring foreign capital inflows. The federal budget deficit will continue to grow, and the dollar will continue to strengthen—mitigate the negative impact of tariffs on Chinese exports—as long as investors believe that the growth of U.S. Treasury yields will lag behind the growth of U.S. stock indexes. The gap between domestic savings and investment—the main cause of the U.S. trade deficit with China and Europe—will only widen.

Trump faces a major dilemma: can he simultaneously secure high tariffs, a weaker dollar, and the continued global hegemony of the American currency? Having studied the Plaza Accord (a hotel in New York) signed in 1985, Chinese leaders assume that Trump will try to do to them what Ronald Reagan did to the Japanese 40 years ago. In other words, China can choose between two poisons: a significant increase in the value of the yuan and high tariffs on Chinese goods. This brings us to the political and geostrategic dimension of this problem.

Trump knows that China is not Japan, whose postwar constitution was written by American officials and which has 55.000 American troops stationed there. China is also no longer as dependent on the American market as it once was, thanks to diversification and the fact that it has managed to make its products and supply chains, which it owns entirely, irreplaceable around the world.

The chances of China giving in and making the yuan stronger to avoid Trump’s tariffs are negligible. Chinese leaders know full well that the Plaza Accord’s revaluation of the yen was key to a lasting slowdown in Japanese industrial and financial growth.

However, even though he knows that China will not agree to a revaluation to avoid high tariffs, Trump will certainly impose them, for political and symbolic reasons. Negotiations will then begin that will lead to a compromise and somewhat lower tariffs.

As predicted by James K. Galbraith, the tariffs will not significantly affect Chinese manufacturers, and during this period, world trade will adjust to the new situation. The United States will buy more goods from Vietnam and India, and Chinese exports to Europe and the rest of the world will increase several times. The economic bloc that could suffer the most losses from Trump's tariffs is not China, but the European Union.

Also, the digital-tech wall that is being erected between China and the United States is already affecting major companies in both countries. Hordes of engineers in China are making great strides in producing advanced microchips whose technology China would not have been able to master if it were not for the New Cold War that began in Trump’s first term – a policy that former President Biden took up and even escalated.

On the other hand, America's concentration of capital in the "cloud", its advantage in digital research and development, and Trump's announced tariffs have already motivated European companies to redirect their investment funds to the US. In short, if anyone has reason to despair about Trump's tariffs, it is not China, but Europe.
That doesn't mean China has no reason to worry. The big question is whether American hawks will be satisfied with high tariffs and anti-China rhetoric, or whether their belligerence will spiral out of control and continue to intensify in a vicious circle. More specifically, will they be able to convince Trump that tariffs should be replaced by financial sanctions, like the ones the US and the EU have imposed on Russia?

If that happens, the Chinese leadership will have to resolve its dilemma, and sooner than planned. Should it preempt potential financial sanctions by transforming the BRICS (Brazil, Russia, India, China, South Africa, and five new members) into a Bretton Woods-style monetary system, with the yuan as the anchor currency and China’s trade surplus as its base? Or is it better to stay within the broader dollar system and wait for the internal contradictions in the United States to be resolved?

China has been slow to act. While it has been developing various payment systems, it has not yet insisted on turning BRICS into a monetary system. BRICS Pay, for example, is a fascinating experiment that combines blockchain technology and cross-border central planning to build a payment system that breaks the West’s monopoly on electronic transfers. But with payments denominated in different currencies, with a common underlying currency, BRICS Pay is as far from a functioning monetary system as SWIFT is from the eurozone.

For BRICS to become a serious challenger to the international monetary order built on the dollar, China would have to make its surpluses available to BRICS, so that the rupees that Russia earns from oil exports to India could be exchanged at a quasi-fixed rate for yuan, which would be spent on purchasing Chinese goods – a function that the US performed in the 50s and 60s to secure the Bretton Woods system.
That would be a huge step for China and a serious challenge to the dollar's dominance. But whether China will dare to do so will be determined by geopolitics, not economics.

Vijesti

(The author is a former finance minister of Greece)

THE LANGUAGE IN WHICH THEY ARE WRITTEN, AS WELL AS THE VIEWS EXPRESSED IN THE COLUMNS, DO NOT ALWAYS REFLECT THE EDITORIAL POLICY OF "FREE PRESS"