Donald Trump’s Plaza Hotel days are pivotal to the myth of omniscience and omnipotence the US president crafted for himself.
That was back in the 1980s, a formative time in Trump’s evolution from Queens kid to Manhattan real-estate mogul. Back then, the Plaza was the default setting for Hollywood looking for an opulent, yet recognizable setting. Dudley Moore’s Arthur was filmed here. So were Crocodile Dundee and Home Alone II, in which Trump made a cameo appearance.
The worldview Trump brought into the White House was informed by that experience – and that period. More specifically, a lively scene that unfolded at the Plaza in September 1985. That deal to weaken the US dollar sharply versus the Japanese yen, after all, is the frame that informs Trump’s policies toward China.
Fast forward 34 years, and Trump is looking to give China the Plaza treatment.
This week, his trade negotiators made clear that a deal on currencies must be part of any broader trade agreement. On Friday, Trump claimed a “preliminary” China deal had, “in principle,” been hashed out.
No word, though, on the really big issues: intellectual property rights, subsidies for state-run enterprises, China access for corporate America, what happens with the rest of Trump’s tariffs. And, clear and binding details on plans for exchange rates.
Exchange-rate risks will remain a live issue. For years now, Trump accused Beijing of exchange-rate shenanigans to juice exports. In August, Trump’s White House made it official, branding China a currency “manipulator.”
Now, Treasury Secretary Steven Mnuchin is angling to get President Xi Jinping’s government to make a no-devaluation pledge official. In April, Mnuchin hinted that a pact to force the yuan to rise in foreign-exchange markets was nearly complete.
Not so much, as Trump’s China trade war drove Beijing and Washington further and further apart.
The currency issue is once again front and center. Yet this could end up being a deal-breaker.
The Trump White House seems to have missed that the yuan’s 3.23% drop this year is legitimate. The trade war is slamming mainland exports, which fell for a fifth straight month in September – down 3% year-on-year. It’s devastating Chinese industrial production, purchasing managers’ orders and retail sales.
The yuan is sliding because China’s unbalanced, debt-plagued economy is struggling to achieve this year’s 6% growth target. It’s falling because Trump’s tariffs are tossing sand in the gears of Asia’s biggest economy. It’s falling because the odds favor the People’s Bank of China cutting interest rates soon.
It’s falling, too, because, despite interest-rate differentials, Trump’s economy is holding its own better than Xi’s.
Even so, Trump’s “Plaza Accord” mindset dominates bilateral dynamics. Trump recalls fondly how that 1985 currency deal set the stage for America’s return to dominance and Japan’s comeuppance. It’s too simplistic to blame all of Japan’s troubles later in the ’80s on exchange rates. But Tokyo never quite recovered from the more than 50% rally in the yen.
Since then, the International Monetary Fund churned out countless reports exploring whether the revaluation led to Japan’s lost decades. There’s no doubt that the yen’s surge from 1985 to 1987 left Japan Inc far less competitive. Or that it added more fuel to asset bubbles. Or that it ended up denting Tokyo’s confidence for years to come.
China wants to avoid that fate, of course. Xi surely knows that Beijing’s challenges are in the same ballpark as Japan’s, circa 1985. China, like Japan, runs a large trade surplus that gets the blame for the US losing jobs. There are fears in America, too, about China overtaking it as the biggest economy.
Trump, not surprisingly, sees a currency deal as a magic wand of sorts. To him, it’s the quickest and most fool-proof way to pull millions of jobs Trump believes China stole back home to the US.
It’s not that simple, of course. Tariffs on as much as US$500 billion of Chinese goods aren’t sending factories to the US. Instead, those jobs are pivoting to Vietnam, the Philippines and Thailand.
A stronger yuan and weaker dollar also isn’t the panacea Trump thinks. It would do nothing to alter the dynamics of the US economy. Zero to increase innovation, productivity or competitiveness. Zero to address inequality, fix America’s crumbling infrastructure or improve a tertiary education system falling behind other developed nations.
Whether it’s nostalgia or ignorance, Trump’s belief that a currency agreement will be a game-changer is misplaced.