| China's decision this week to let its currency weaken against the dollar past a level it had defended for weeks highlights the potential for 2025 to see major tensions over exchange-rate policy. Donald Trump and his deputies have long accused American trading partners of gaining unfair advantage for their exporters by pursuing exchange-rate devaluation. He singled out China and Japan in a Bloomberg Businessweek interview last June for maintaining cheap currencies, saying they put a "tremendous burden" on US companies. With the Chinese yuan even weaker now than back then, this week's move will almost certainly not go unnoticed by Trump and his incoming team. In June, he noted that his first administration had been very focused on keeping foreign exchange rates "up" via tariff threats. While there are readily understandable reasons for China's currency depreciation—its interest rates have been plumbing new lows thanks to still-stagnant domestic demand—Trump's history suggests disinterest in extenuating circumstances. The big risk for everyone is that the latest drop in the yuan will fuel Trump's determination to proceed with a unilateralist international economic agenda, one that bears a dangerous resemblance to that of the 1930s.  US ports like this one in Los Angeles saw a surge of imports in the final weeks of 2024, ahead of the incoming administration and Donald Trump's threats of new tariffs. Photographer: Eric Thayer/Bloomberg This week in the New Economy | - China raises salaries for government workers to boost spending.
- Brazil's currency slid 21% last year as investors lose confidence in Lula.
- Nigeria moves to cut costly fuel imports with a $900 million refinery fix.
- Foreign investors became net sellers of Indian stocks in 2024.
- Microsoft plans to spend $80 billion for AI data centers in 2025.
Currency wars are hardly new. The most famous came in the 1930s, when the US and other nations engaged in serial currency depreciation alongside tariff hikes. Dubbed a "beggar-thy-neighbor" cycle, it left global commerce as a whole worse off—as a recent National Bureau of Economic Research paper shows. Using a new database of quarterly trade-flow data from the period, economists Kris Mitchener of Santa Clara University's Leavey School of Business and Kirsten Wandschneider of the University of Vienna found that the 1930s currency wars reduced trade by at least 18%. "The devaluations of the early 1930s already signaled a new approach to
policymaking: countries would prioritize their domestic economic situations over the international system," Mitchener and Wandschneider wrote. And there would be no "clear signals as to what would replace" the previous system. Newly elected President Franklin D. Roosevelt demonstrated his America-first approach in 1933 by skipping a global economic conference in London that summer, underscoring his stance by even going on a sailing holiday. The upshot was that more than 70 economies ended up devaluing currencies, disrupting trade flows with rising costs and broader mercantile tensions. After World War II, the US embraced a very different approach. It became much more willing to open its markets and participate in global economic and financial coordination through full-time institutions, including the International Monetary Fund. That sort of global camaraderie was seen again in the aftermath of the 2008 financial crisis, when the US and other Group of 20 members foreswore competitive devaluations. Today's vibe is more akin to the 1930s. FDR being unafraid of violating previous norms and shrugging off international pressure surely has a parallel with Trump. Bloomberg Economics in its special report on the global outlook last month described the president-elect as positioning for a "bonfire of the verities." (To access the full note on the Bloomberg terminal, click here.)  Franklin D Roosevelt gives a speech in Philadelphia in 1936. Photographer: Keystone Features/Hulton Archive/Getty Images Put simply, "free trade is out, protectionism is in. Worrying about the debt is out, tax cuts are in. The US security guarantee is out, do-it-yourself defense is in," the Bloomberg Economics team, led by Tom Orlik, wrote. Even so, Trump's promised tariff hikes are likely to stop short of the numbers he threw out on the campaign trail, including a universal levy as high as 20% and China tariffs of 60%, Orlik said. That's largely the conventional wisdom that's emerged ahead of Inauguration Day on Jan. 20. China specialists Arthur Kroeber and Thomas Gatley at Gavekal Dragonomics wrote last month that their base case involves some kind of deal between Trump and Chinese President Xi Jinping that "freezes tariffs and export controls at some level that both sides can tolerate." But the danger is that either Washington or Beijing miscalculates in its response to the other side, and goes too far—leading to the kind of escalation of mercantilist measures seen in the 1930s. "Even in the best-case scenario, the swing from free trade to protectionism is bad news for the global economy," Orlik wrote. "If Trump goes full throttle on tariffs, everything from Apple's Asia supply chain to GM's made-in-Mexico autos are at risk." —Chris Anstey | 
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