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Switzerland and Vietnam have officially been designated as currency manipulators, the Treasury Department announced today. 

Why it matters: The designation allows the White House to impose a broad range of tariffs, sanctions and other punishments on the two friendly countries, both of whom have been struggling with strengthening currencies this year.

The Swiss franc is a classic "flight-to-quality" currency, bought in times of global crisis and uncertainty. When that happens, Swiss exporters suffer, and the domestic inflation rate risks turning negative. So the central bank has intervened in currency markets to slow the strengthening of the currency.

Vietnam has been the primary beneficiary of the U.S. trade war with China. Global manufacturers who don't want to have all their eggs in the China basket have been moving some of their operations to Vietnam, which carries much less geopolitical risk. The increase in Vietnamese exports has strengthened the currency, and the central bank has tried to keep that strengthening under control.

The big picture: The "currency manipulator" label is rarely used. Until now it has only been applied to China (in 2019 and between 1992 and 1994), as well as Japan and Taiwan in the late 1980s.

Between the lines: While most U.S. administrations pay lip service to the idea that a strong dollar is in the national interest, Trump has aggressively taken the other side, seeking a weaker dollar — which means he wants other countries' currencies to be stronger. Even though the Swiss and Vietnamese currencies have been strengthening, he doesn't think they've been strengthening enough. 

The bottom line: The designation will likely have limited practical consequence between now and Jan. 21, at which point a friendlier and more multilateralist Biden administration could try to salve any hurt feelings from this move. 

U.S. accuses Switzerland and Vietnam of currency war

The "currency manipulator" label is rarely used.

Treasury Secretary Steven Mnuchin. Photo: Alex Wong/Getty Images

Business

Currencies

World

Trade war

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Economic tension between the U.S. and China continues to escalate but is shifting in focus — away from the tit-for-tat trade war and toward a more direct confrontation over the future of technology at the heart of the conflict between the world's two largest economies.

Why it matters: The battle between the U.S. and China was always about tech supremacy and the direct confrontation could result in an accelerated splintering of global supply chains and a significant reduction of international commerce.

There are $700 billion of U.S. companies' assets in China, generating $500 billion in domestic sales annually, per Barron's. 

Yes, but: The torrent of anti-Chinese rhetoric by the Trump administration recently has been countered by much softer actions, as the administration attempts to "thread the needle" of looking tough heading into the election while having the Chinese continue to purchase U.S. goods, Mary Lovely, senior fellow at the Peterson Institute for International Economics, tells Axios.

"The tech issue is the big one … for the long term, but for the election it’s not at all clear to me that the tech issue is the big one."

Between the lines: The U.S. trade deficit to China has increased notably this year and China's manufacturing sector has benefited from exporting medical equipment and its recovery from the coronavirus pandemic being far ahead of other economies, especially the U.S.

The Chinese also have insisted they are increasing purchases of U.S. goods in line with the "phase one" trade deal, though they remain well behind a pace necessary to meet the agreement.

Driving the news: President Trump gave his "blessing" to a deal for Oracle and Walmart to form a new entity called TikTok Global, headquartered in the U.S., that will allow the video-sharing app to keep operating in the country but requested $5 billion during a speech as part of the deal to create an "education fund for American youth."

The Trump administration also tried to ban Tencent's ubiquitous WeChat app in the U.S.

Seemingly in retaliation, China has threatened to "block" a deal between U.S.-based Nvidia and Japanese-owned SoftBank for U.K.-based computer chip designer Arm.

China's state-run Global Times did not detail how Chinese regulators could block the deal.

The big picture: "The trade war is fizzling out and the tech war is heating up," David Dollar, senior fellow at the Brookings Institution, tells Axios.

"There are more legitimate areas of concern as China’s tech capability grows and I think there’s more awareness on the part of the United States."

"Part of it is just people waking up and realizing that companies have a lot of access to information about us and we don’t really know what they’re doing with that."

With the U.S. also looking to block Chinese companies like Huawei from access to U.S. technology, Chinese firms are working to develop a home-grown ecosystem to replace products from companies like Intel, Oracle and IBM.

What's happening: "U.S. actions on TikTok are just the latest example of the White House seeking to impede or punish Chinese companies from succeeding in gaining important leverage in technology and global communications and have heightened Chinese sensitivities," Steven Skancke, a former Treasury Department official who now serves as chief economic adviser at Keel Point, tells Axios.

"While TikTok is a highly visible rebuke of a China technology company, it is probably less strategic than what China fears would be a further threat to its plans for Huawei gaining dominance in global  communications."

That's got investors betting big on tech companies from China, which have seen a bigger run-up in stock prices than even U.S. tech shares. 

Watch this space: The tech war could escalate to the point that U.S. companies as large as Apple could be expelled from China, Laura Martin, senior research analyst at Needham, told me on the latest episode of the "Market Banter" podcast. 

"I think if Trump gets re-elected, he keeps turning up the heat on China."

The tech war between the U.S. and China escalates

The direct confrontation could result in an accelerated splintering of global supply chains.

Illustration of two cursor hands making a gun sign pointing at each other. 

China

Technology

Big Tech

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Data: U.S. Bureau of Economic Analysis; Chart: Axios Visuals

The Trump administration's trade war with China and the coronavirus pandemic have crippled U.S. exports this year and could worsen as the administration reportedly is considering export restrictions on China’s most advanced manufacturer of semiconductors.

Where it stands: The U.S. trade deficit has risen to its highest since July 2008 and U.S. exports of goods and services as a percentage of GDP shrank to the lowest level since 2003 in the second quarter.

Why it matters: While exports aren't a major contributor to U.S. GDP, adding such restrictions on sales to a trading partner as large as China’s Semiconductor Manufacturing International Corp. risks doing real harm to U.S. growth as companies try to bounce back from the pandemic.

Between the lines: China's economy is recovering more quickly than other countries but Beijing remains well behind in its commitments to purchase increased U.S. goods and services.

The U.S. already has placed similar restrictions on Chinese telecom giant Huawei, another major buyer of American-made tech products.

Chinese officials say the export restrictions have simply accelerated development of domestically produced equipment to replace the U.S. products.

The big picture: Exports as a percentage of GDP represented 12.4% of U.S. GDP as recently as the second quarter of 2018, and had remained above 12% until Q2 2019, but have fallen precipitously since.

Trump looks to be doubling down, threatening to punish American companies that create jobs overseas and to deny those that do business in China federal contracts, in a White House news conference Monday.

Possible restrictions on Chinese chip exports could do harm to U.S. growth

Trump's trade war with China could be further exacerbated.

Exports

Reproduced from CivicScience; Chart: Axios Visuals

U.S. consumers are getting less concerned about the impact of tariffs on their daily lives, new data show.

What happening: After consumer concern about the tariffs rose to record highs in April and May, CivicScience noted a consistent decline that has pushed overall readings on concern down to nearly their levels before the pandemic began in the U.S.

By the numbers: For the full month of August, 65% of U.S. adults say they’re at least somewhat concerned about the impact of recent trade policies on their household expenses, down three points from 68% in the month of July.

What to watch: Tariffs are still in place on most Chinese exports to the U.S. and on many Chinese imports from the U.S., so businesses and consumers are still paying duties on hundreds of billions of dollars of goods.

Both sides in the U.S.-China trade war have pledged their commitment to the "phase one" trade deal, though President Trump has said he has no plans to negotiate a phase two.

Americans are less worried about tariffs

Concern is nearly down to the levels before the pandemic began.

Tariffs

Reproduced from Peterson Institute for International Economics; Chart: Axios Visuals

To satisfy the conditions of the phase one U.S.-China trade deal, China is expected to purchase at least $200 billion more in U.S. exports combined in 2020 and 2021. Data shows that as of July they are more than 50% behind the pace of expected purchases.

By the numbers: So far, China's purchase of covered products was $39.3 billion, compared with a year-to-date target of $83.2 billion, Chad Bown, a fellow at the Peterson Institute for International Economics, notes.

Through July, Chinese imports of all uncovered products from the U.S. were actually 28% lower than over the same period in 2017.

Driving the news: Following a videoconference between senior U.S. and Chinese officials on Monday, both sides said they were committed to carrying out the deal.

More importantly, no adjustments or plans for China to realistically meet the targets were announced despite the severe disruption to its economy as a result of the coronavirus pandemic.

Why it matters: With tariffs still in place on most Chinese exports to the U.S. and on many Chinese imports from the U.S., businesses and consumers are still paying the trade wars costs, but are seeing less than half of the purported benefits from the conflict's lone agreement.

In particular, American farmers, who have suffered greatly from the trade war, were anticipating a boost from the increased Chinese purchases after retaliation from Beijing caused a severe decline in commodity prices and exports last year.

Yes, but: Earlier this month the Department of Agriculture reported the sale of 126,000 tonnes of soybeans to China, the eighth consecutive weekday with large sales to Chinese buyers.

And U.S. oil traders, shipbrokers and Chinese importers reportedly told Reuters that Chinese state-owned oil firms have plans to carry at least 20 million barrels of U.S. crude for August and September.

Between the lines: As Axios' Bethany Allen-Ebrahimian wrote last week, trade is the last major area where the U.S. is still relying on traditional diplomacy with China, as President Trump has ratcheted up measures targeting China heading into the November presidential election.

China is less than halfway to its "phase 1" trade deal targets

So far, China's purchase of covered products was $39.3 billion, compared with a target of $83.2 billion.

U.S. China trade war

Lost amid headlines about the coronavirus pandemic and the seemingly unstoppable stock market rally, has been the monthslong escalation of tensions in the U.S.-China trade war —  and it's likely here to stay.

Why it matters: The tariffs continue to impress a sizable tax on U.S. companies and consumers, adding additional costs and red tape for small businesses, farmers, manufacturers and households trying to stay afloat amid the pandemic.

"The trade war has been quietly intensifying," Stephen Gallagher, chief economist at Société Générale, tells Axios.

Driving the news: White House chief of staff Mark Meadows said late Wednesday that administration officials are "looking at the national security risk as it relates to TikTok, WeChat and other apps" from China and could announce bans in the coming weeks.

That followed remarks from President Trump on Tuesday that he had no plans for "phase two" trade deal negotiations and was "not interested right now in talking to China.”

What's happening: The "phase one" deal was cheered by investors as a positive first step, because it stopped a tit-for-tat tariff escalation that was poised to add a tax to nearly every product traded between the U.S. and China.

However, it did nothing about tariffs on hundreds of billions of dollars of Chinese imports already in place that are paid by U.S. companies.

Why you'll hear about this again: With the U.S. ratcheting up the pressure, there is a decreasing likelihood China lives up to its "phase one" agreement.

That means a diminished outlook for industries that were counting on the $200 billion in increased purchases of U.S. agriculture, energy and manufacturing after a brutal 2019.

Remember: The primary cost of tariffs isn't the tariffs themselves, but the deadweight loss of consumers buying more expensive, or less efficient, products.

The trade war also is a major factor pushing businesses to pull supply chains and production out of China, increasing costs and uprooting longstanding relationships.

For big companies, this will weigh on margins; for small companies, it could mean going out of business.

Don't sleep: Deutsche Bank’s global head of tech strategy Apjit Walia warns that the demand disruption, supply chain upheaval and bifurcated tech standards from a "Tech Cold War" between the U.S. and China could cost the sector more than $3.5 trillion over the next five years.

What's next: Even if Trump loses in November, investors don't expect a significant change in the U.S. approach to China given Joe Biden's recent rhetoric and bipartisan legislation condemning China for its treatment of Uighur Muslims and restrictions on public companies.

The U.S.-China trade war quietly escalates

Photo Illustration: Sarah Grillo/Axios. Photos: Alex Wong/Getty Images and Lintao Zhang/Getty Images

Politics

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

While the U.S.-China trade war has drawn fewer headlines in recent months, nearly seven in 10 Americans say they are concerned about how tariffs are impacting the cost of things they purchase. That's the same number registered in March when the coronavirus pandemic began to escalate.

Why it matters: Despite record low interest rates and trillions of dollars in stimulus from Congress and the Fed, everyday Americans say they are pulling back spending, with 28% saying they are buying less than they used to because prices had increased.

That number is up from 19% a year ago, according to data from CivicScience, first to Axios.

The big picture: Concern about tariffs overall has risen notably since 2019.

"Consider that, when comparing this to concern about tariffs a year ago, when CivicScience started tracking the topic, things have increased pretty dramatically," CivicScience analysts note.

"In June of 2019, 61% of American adults were at least somewhat concerned about tariffs, so eight percentage points lower than it is in June 2020."

More than a quarter of Americans are spending less because of China tariffs

Trump trade war

Axios Pro Rata

Protectionism is poised to play an elevated role in global dealmaking, particularly as countries grapple with the economic fallout of COVID-19.

Driving the news: Governments are creating new regulations and incentives to maintain local ownership of homegrown companies.

France’s Finance Ministry on Friday formed a fund to invest in domestic tech companies if they receive unsolicited takeover offers from foreign suitors. It begins with €150 million, managed via state-backed lender Bpifrance, but could expand to €500 million next year.

Australia has proposed a series of changes related to foreign takeover offers in all sorts of industries, regardless of deal size, including one that would let the country's treasurer force divestitures on the basis of national security.

Poland, Hungary and the Czech Republic are in various stages of implementing new restrictions of foreign direct investments, with the goal of restricting takeovers by non-EU companies.

Germany also strengthened its screening of foreign direct investments, initially aimed at health care, but it's expected to expand to other "sensitive" industries like artificial intelligence.

Sweden today got into the act, with top government officials introducing a series of proposals to better screen foreign direct investments.

India last month said that companies from its seven neighboring nations, including China, must receive government approval for takeovers of Indian businesses. It also applies to other changes to beneficial ownership.

The U.S. doesn't appear likely to enact similar restrictions, regardless of White House saber-rattling toward China, although there was that proposal from some congressional Democrats in April to put an overall moratorium on large M&A until the pandemic subsides.

By the numbers: Global cross-border merger activity is down 40% year-to-date, compared to an overall 43% drop in total M&A, per Refintiv. Cross-border deals for European targets, however, are down 5% versus an overall 12% increase in European dealmaking.

The bottom line: The world may be flat, but political policy is marked by peaks and valleys.

Governments turn to protectionism in pandemic fallout

Global cross-border merger activity is down 40% year-to-date.

Protectionism

As the coronavirus pandemic appears to be subsiding in China, it's becoming clear that its targets for the phase one trade deal with the U.S. are unrealistic and there is so far no sign of a plan for renegotiation.

What's happening: White House National Economic Council director Larry Kudlow said Thursday the trade deal was "intact, and China has every intent of implementing it."

Chinese Premier Li Keqiang said Friday that Beijing plans to "work with the United States to implement the phase one China-U.S. economic and trade agreement."

Background: China agreed to buy $200 billion more in U.S. goods over the next two years than it bought in 2017. 

The deal paused further escalation in tariffs and helped spur bullish sentiment (even though it did not remove many of the already implemented tariffs).

Yes, but: While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall. 

Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019's levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.

The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped. 

By the numbers: Given the lull in imports during the January–March period, China would need to buy an "impossible" $2.9 billion of energy per month from April to December, Jason Bordoff, a former senior director at the U.S. National Security Council, writes in Foreign Policy.

"[A]t $30 per barrel (the U.S. government’s projected average price for 2020), that’s equivalent to about 3 million barrels of  oil per day, or the total of all U.S. daily crude exports in 2019."

"That China would buy every last drop of exported U.S. oil is unrealistic enough — but today, that oil is not even available, as U.S. oil exports are projected to fall this year along with the collapse in U.S. shale  output, which is projected to drop by roughly one-third over the next year."

One more thing: China also is facing renewed street protests in Hong Kong after passing a controversial national security law that Secretary of State Mike Pompeo called a “death knell” for Hong Kong's autonomy.

White House National Security Advisor Robert O’Brien said the U.S. is likely to impose sanctions on China if the law is passed.

China's Foreign Minister Wang Yi warned that some in the U.S. were pushing relations toward a "new Cold War."

Go deeper: Beijing says U.S. should give up "wishful thinking" of changing China

U.S.-China trade tensions are escalating again

The pandemic caused China to fall behind on its commitments.

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Axios World

Sen. Josh Hawley (R-Mo.) will lambast China on Wednesday, arguing on the Senate floor that the existing international order must be ripped up to avert a future in which America takes “second place to the imperialists in Beijing.”

Why it matters: Hawley’s star has risen fast, and the 40-year-old freshman senator is often discussed as a 2024 presidential prospect. He’s betting that Trump’s populist nationalism and hawkishness on China aren’t passing phenomena, but the future of the Republican Party.

In the speech, which was shared with Axios ahead of delivery, Hawley will articulate his own vision of America First.

“The international order as we have known it for thirty years is breaking. Now imperialist China seeks to remake the world in its own image, and to bend the global economy to its own will.”

“Are we in this nation willing to witness the slow destruction of the free world? Are we willing to watch our own way of life, our own liberties and livelihoods, grow dependent on the policy of Beijing?”

“Now we must recognize that the economic system designed by Western policy makers at the end of the Cold War does not serve our purposes in this new era."

Between the lines: Hawley is one of a few prominent Republicans — among them Secretary of State Mike Pompeo and Sen. Tom Cotton (R-Ark.) — building intellectual architecture around the fire and fury of Trump’s foreign policy. 

Hawley also echoes the Trump administration in arguing that China’s “failures and lies” unleashed a pandemic onto the world, for which Beijing is directly responsible.

But Hawley has gone further than even Trump on trade, calling for the U.S. to withdraw from the World Trade Organization and introducing a joint resolution this month to make that happen.

Hawley’s proposal has little chance of passage, and an assortment of trade experts and pro-business groups have warned of dire economic consequences if it did.

But China hawks in Washington increasingly view Beijing’s admission into the organization in 2001 as the original sin of America's China policy.

Hawley argues in the speech that America cannot be prosperous and secure in a world where China's economy and influence come to dwarf America’s thanks to imbalanced trading relationships.

The bottom line: Beyond the WTO proposal, Hawley's speech is more ideology than policy. But this sort of rhetoric is likely to reverberate, at least among Republicans, even after Trump leaves office.

Go deeper: The "new Cold War" started in Beijing

Josh Hawley crafts the case against China

He's betting on populist nationalism as the future of the GOP.

Hawley. Photo: Carlos Barria-Pool/Getty Images

Josh Hawley

Data: U.S. Dept. of Commerce; Chart: Chris Canipe/Axios


President Trump's trade war has led to even bigger trade deficits with China, even though it was intended to improve the trade balance. But it's not just China — the deficit has increased with most of our other major trade partners, too.

Why it matters: While economists agree that trade deficits aren't a good way to measure   a trade relationship, they are the metric Trump fixates on, made campaign promises about and uses to evaluate relationships with other countries. 

Throughout his campaign, Trump vowed that he would wipe away the U.S.'s trade deficits: "You will see a drop [in the trade deficit] like you’ve never seen before.” 

Reality check: Among the U.S.'s 15 biggest trading partners, the trade balance has moved in the wrong direction for Trump in 10 of those countries between 2016 and 2018, while the aggregate trade deficit has jumped from $503 billion to $628B.

While Trump can explain the deficit spike with China as a short-term sacrifice for long-term benefit, it doesn't account for the wider trend.

The latest: The U.S. trade deficit in the first 6 months of 2019 is even bigger than in the last two years.

What's going on: Trump's tax cuts are as much to blame for the increase in the trade deficit as anything else, writes Axios Markets editor Dion Rabouin:

More money in Americans' pockets leads to more consumption, often of Chinese-made goods.

The tax cut helped boost the value of the dollar, which makes imports to the U.S. relatively cheaper.

The big picture: Trade deficits mean we buy more from a country than they buy from us, but that doesn’t necessarily mean the relationship is unfair, writes Axios business editor Dan Primack. 

For example, you have a “trade deficit” with your local grocery: you give them money and get food in return. 

Between the lines: Despite the dubious merit of the trade deficit as a useful barometer of the health of a trade relationship, Trump's obsession with the number has led to strained relations with key allies.

As Axios' Jonathan Swan reported in 2017, the trade deficit is one of the items he always wants to be briefed on before meeting with a foreign leader.

Trump picked a fight with Justin Trudeau over the trade balance, later acknowledging that he made up numbers in arguing that the U.S. has a trade deficit with Canada. It has a surplus.

Coupled with immigration, the trade deficit has been a major source of Trump's animus toward Mexico.

It led Trump to threaten auto tariffs on Europe. 

Despite promises, Trump's trade deficits are only growing

Under Trump, the U.S. trade deficit has increased by $125 billion.

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