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Key Takeaways

• Countries may begin quietly devaluing their currencies to offset tariffs and gain export advantages.
• China’s yuan is at its weakest level in years, suggesting strategic currency weakening.
• Currency wars threaten inflation, trade instability, and weakened global trust.
• History shows similar dynamics preceded major economic collapses—like the 1930s.
• If every nation devalues to compete, it risks a “race to the bottom” with no real winners.

The world is spiraling toward a full-blown trade war.

• Put simply, a trade war is a back-and-forth economic battle where countries impose tariffs and restrictions to protect their domestic industries - especially manufacturing - and improve their trade balances.

Right now, the U.S. is squaring off with its biggest trade partners - including the E.U., South Korea, Japan, and China - as President Donald Trump pushes to “rebalance” the economy by reviving U.S. manufacturing and boosting exports.

• On April 9th, Trump rolled out a sweeping new round of tariffs - some as high as 145% - but issued a 90-day pause on most increases to allow for negotiations. China was the exception. It was hit immediately. The message is clear - this is a direct shot at Beijing (in return, China hiked tariffs on the US to 125%¹).

And while the pause for negotiations is a welcome sign, countries aren’t going to sit still and just cave. Even with any trade deal, they don’t want to lose their export competitiveness.

With all this in mind, the U.S. seems to hold the upper hand (economically speaking). In 2024, the U.S. trade deficit hit a record $914 billion, up 17% from 2023². A strong dollar is pulling in imports at an aggressive pace - meaning the global economy earned nearly a trillion dollars last year just by selling into the U.S. alone. This implies the world greatly depends on the U.S. consumer (far more so than their own).

But here’s the problem: There may be no real winners in this fight.

Even if the U.S. manufacturing sector starts to recover, inflation from higher production costs could squeeze household incomes, reduce consumer spending, eat into corporate profits – and ultimately lead to job losses.

• It could be a pyrrhic victory - winning a war but only after burning everything down.

I’ve written to you before about China’s major dependence on exports, Trump’s tariff strategy (for better or worse), and how global imbalances can’t be solved by trade policy alone.

But now, things feel different.

Because what started as a trade war may be turning into something more dangerous. . .

I’m talking about a currency war.

What is a Currency War?

A currency war happens when countries compete to weaken their own currency. Why? To make their exports cheaper.

When a country’s currency falls, foreign buyers can afford more of its goods. Sales rise. Manufacturers get a boost.

But if too many countries try it at once, chaos follows - rising inflation, broken supply chains, and shaky relations. It turns into an economic arms race (for instance, a currency war broke out during the late 1920s to 1930s and played a role in World War II).

Why a Weaker Currency Helps Exports

Let’s simplify:

Say a camera costs 100,000 yen in Japan.

• If the exchange rate is 100 yen to the dollar, it costs a U.S. buyer $1,000.
• If the yen weakens to 125, the same camera costs $800.

Nothing changed in Japan. But the price fell in dollar terms. That makes Japanese exports more competitive.

Thus, once a country weakens its currency:

1. Exports become cheaper, helping domestic manufacturers.
   
2. Imports become more expensive, which can reduce imports and fuel inflation.

And there’s a third effect many overlook. . .

3. A weaker currency can cancel out the impact of tariffs. If a foreign government slaps taxes on your exports, lowering your exchange rate can bring prices back down - and neutralize the tariff.

That’s what we may be seeing now.

The Trade War Starts - and Ends - with China

China is the world’s largest exporting economy – and greatly depends on its manufacturing sector for growth (especially now that they’re going through their own 2008 housing bust).

I wrote about this back in March 2024 – “China’s Manufacturing Glut: How Overproduction & Trade Tensions Could Spark a Global Crisis” - but the gist is that they have doubled down on exports and manufacturing to keep their economy chugging along as the real estate bubble popped.

To give you some numbers: In 2024, manufacturing made up a whopping 25% of China’s GDP (a substantial amount), highlighting its pivotal role in the economy. At the same time, China exported goods worth 25.45 trillion yuan (about $3.5 trillion) - a 7.1% increase from the previous year - showing just how dependent the country remains on exports for growth³.

Thus, all trade war talks will come down to dealing with China. But that may be difficult as they’re digging in and raising tariffs back on the U.S.

Still, even with retaliatory tariffs, China faces a core problem: it exports far more to the U.S. than it imports - about $300 billion more as of 2024. Thus, on a net basis, that means China has far more to lose in this trade fight.

China vs. The World

But it's not just about China vs. the US.

China actually floods the world with its exports, which has frustrated many countries as they don’t want to absorb the excess imports from China.

For example:

• In October 2024, the European Union imposed tariffs of up to 45.3% on Chinese electric vehicles to protect domestic auto manufacturers⁴.
  
  
• In August, Canada followed suit with 100% tariffs on Chinese EVs.
  
  
• In June, Turkey raised tariffs 40% to protect its local auto industry.
  
  
• India blocked several Chinese investment deals and restricted imports over national security concerns.
  
  
• Indonesia, Thailand, Brazil, Chile, and others have all introduced tariffs or barriers to protect local businesses from China’s export wave.

It’s a global pushback. But the U.S.-China standoff still grabs the headlines.

Beijing’s Position: Export at All Costs

Making matters worse, Chinese leaders show no interest in backing down from an export slowdown.

In fact, back in late 2024, Zongyuan Zoe Liu wrote an intriguing piece in Foreign Affairs⁵ that China’s Communist Party doesn’t trust consumer spending. The leadership sees it as wasteful, even dangerous, as "consumption is an individualistic distraction that threatens to divert resources away from China's core economic strength: its industrial base."

Their policies reflect that mindset. Rather than encouraging domestic consumption - which would naturally increase imports - they’re tightening it and doubling down on exports.

Ironically, this approach is likely to deepen China’s ongoing oversupply problem, the very issue weighing down its economy today.

And now, they’re turning to their currency.

Is China Devaluing the Yuan?

It looks that way. Or at least the authorities aren't stopping it. 

To highlight this, remember, the Chinese yuan has two versions:

• Offshore yuan (CNH): China’s currency traded outside mainland China (like in Hong Kong), with fewer government controls and more influenced by global market forces.
  
  
• Onshore yuan (CNY): China’s official currency used within the mainland, tightly managed and controlled by the People’s Bank of China.
  
  
• The yuan doesn’t float freely like the U.S. dollar or Euro – the PBOC (China’s central bank) controls it.

Both these currencies are sliding.

The offshore yuan is now at its weakest point since that market opened in 2010.  And the onshore yuan just hit its lowest level since 2007⁶.

Figure 1: Bloomberg, April 2025

Now, Beijing isn’t launching a full-scale devaluation here - but it’s letting the currency slip enough without stepping in.

Why?

Because it offsets the damage from tariffs. It keeps Chinese goods affordable abroad. And it buys time for exporters under pressure.

Let’s say a Chinese product costs $100 when sold to the U.S.

• The U.S. adds a 10% tariff, raising the cost to $110 for the American buyer.

Now, suppose China allows the yuan to depreciate by 10%.

• This means the Chinese product, still priced the same in yuan, now converts into fewer dollars - roughly $90.91 instead of $100.
  
• Thus, when the 10% U.S. tariff is applied, the new price becomes:$90.91 × 1.10 = $100, effectively neutralizing the impact of the tariff.

Put simply, a 10% weaker currency = 10% cheaper product = cancels out the 10% tariff.

So, the buyer still pays about the same, and the tariff loses its impact.

This is a way China – and other countries – could get around the full impact of tariffs.

But Currency Wars Come with Risk

Devaluing your currency might help exports. But it can backfire in a few ways:

• Hurts consumers and importers - Everyday people pay more and companies that rely on foreign parts see margins shrink.
  
  
• Stokes inflation: Higher prices can erode buying power and trigger interest rate hikes.
  
  
• Invites retaliation: If one country makes its currency cheaper, other countries might do the same to stay competitive. This can start a chain reaction, where everyone tries to outdo each other by weakening their currencies – leading to a “race to the bottom”
  
  
• Damages trust: Currency manipulation can strain alliances and trigger sanctions.
  
  
• Scares off investors: A sliding currency may signal instability and uncertainty. Foreign money is pulled out. And markets then tremble.
  

History Says Be Careful

Currency wars have happened a few times before, and it usually leads to more geopolitical tension.

For example:

1. The 1930s (The Original Currency War) - During the early Great Depression, the U.S., U.K., and France all devalued their currencies to try and boost exports.

• This led to significant retaliation by various countries.
  
  
• Global trade collapsed by 60% between 1929-33 as imports collapsed.
  
  
• The world plunged deeper into depression.

2. The 2010s (Post-Crisis Currency Tensions) - After 2008, the U.S. and Japan used quantitative easing (QE) to help weaken their currencies.

• Emerging economies cried foul as they now had to compete with a weaker dollar and yen.
  
  
• Brazil warned of a “currency war”⁷ as numerous countries began joining in to contend with a weaker dollar (such as Israel, Colombia, China, and Switzerland).
  
  
• Capital flows are distorted, creating new tensions.

3. The 2015 China Shock (China’s Yuan Devaluation) - In August 2015, China devalued the yuan by 2%.

• Global markets plunged and commodities sold off as a weaker yuan implied a weaker-than-expected Chinese economy and a glut of exports to deal with.
  
  
• Global fears surged.
  
  
• It helped fuel Trump’s tariff-heavy campaign in 2016.
  
  

Closing Thoughts

If trade wars are loud, currency wars are quiet.

They don’t make front-page headlines. But they can inflict just as much damage.

What started as a fight over tariffs is now becoming a global battle over currency - and the value of money itself.

More nations may reach for the currency playbook to dodge import taxes. But that path leads to retaliation, sanctions, instability - and an erosion of trust in the global system.

And when the country involved is China - the world’s second-largest economy - the consequences ripple far beyond its borders:

• Fewer imports into China, hurting exporters in Australia, Japan, and South Korea.
  
  
• More Chinese exports, flooding the market with cheap goods, undercutting global manufacturers and triggering layoffs.

And these are just two of many possibilities.

But here’s the reality: If every country weakens its currency to stay competitive, no one wins.

The last time we went down this road that aggressively, it ended in depression and war.

Let’s hope history doesn’t rhyme.

Sources:

1. China Raises Tariffs on US Goods to 125% in Retaliation - Bloomberg
2. U.S. International Trade in Goods and Services, December and Annual 2024
3. China Manufacturing Industry Tracker - Key Data for 2024 and 2025
4. EU: Taxing Chinese electric vehicles, then what?
5. China’s Real Economic Crisis: Why Beijing Won’t Give Up on a Failing Model
6. China Engineers Orderly Yuan Drop as Trade War Threatens Growth - Bloomberg
7. Currency War of 2009–2011 - Wikipedia

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