Trump’s attacks on the Fed are a gift to Xi Jinping
Summary
The president would make the Federal Reserve look like the People’s Bank of China, William Pesek writes in a guest commentary.
China’s President Xi Jinping has said he wants the yuan to be a “powerful currency" that plays a bigger role in global trade.
President Donald Trump’s campaign to fire Federal Reserve Chair Jerome Powell is the latest example of an American own goal.
Let’s dispense with Trump-would-never-do-that naiveté. Trump said last week: “If I want him out, he’ll be out of there real fast, believe me." Kevin Hassett, head of the White House National Economic Council, affirmed Trump in a press gaggle. “The president and his team will continue to study" ways to show Powell the door, he said. On Monday, Trump publicly blasted Powell again, name-calling him on Truth Social as “Mr. Too Late" and “a major loser."
Punishing a central banker because he or she won’t cut rates fast enough is the stuff of Argentina, not a Group of Seven nation. It also makes the Fed, the most globally respected U.S. institution, look more like the People’s Bank of China. It is part of the ironic “Chinafication" of the U.S. economy under Trump: As he works to silence the media, neuter the judiciary, bully corporate chieftains, intimidate law firms, distort economic facts, weaken the rule of law, and increase opacity, he’s pushing the U.S. toward the ideologies of Xi Jinping’s Communist Party.
The fact that the Fed is led by technocrats free from direct political influence is a core reason why the dollar is the reserve currency and why U.S. Treasuries are the background music that keeps the global economy in tune. Remove the Fed’s autonomy from the equation, and the rising euro looks great by comparison. So does the Japanese yen, which reached a seven-month high against the dollar this week. And yes, even the Chinese yuan.
In fact, remaking the Fed as a PBOC clone would only hasten China’s progress in internationalizing the yuan at the dollar’s expense, which has been Xi’s most consistent—and arguably successful—financial goal since taking power in 2012.
Trump supporters date the emergence of the China threat back to 2001, when Asia’s biggest economy joined the World Trade Organization. Yet posterity might be more concerned with a different club that China joined in 2016: the International Monetary Fund’s “special drawing rights" basket.
It was then that the yuan joined the dollar, euro, yen, and pound as a reserve-currency asset. Since then, Xi’s central bank has worked steadily to increase the yuan’s role in trade and finance. This includes prodding the BRICS+ nations—including Russia, India, Brazil, South Africa, Saudi Arabia and others—to use the yuan in trade, invoicing, oil sales, bond issuance, you name it.
Yes, it’s a long slog, and the dollar is still the beating heart of the financial universe. But why make it easier for Xi to sell the yuan as a safe-haven currency with fewer fleas than Trump’s dollar?
Anyone who thinks Xi isn’t having his way with Trumpworld isn’t paying attention. Even as China agrees to sit down with Trump’s negotiators—taking its sweet time, of course—Xi is paving the way for a three-way free-trade deal with Japan and South Korea. Last week, Xi made the rounds in Southeast Asia. Lest Trump isn’t aware, the 10 economies of the Association of Southeast Asian Nations are China’s top export market, followed by Europe.
The U.S., China’s third most important customer, can indeed make life difficult for Xi. But the idea that tariffs—even of the 145% variety—will turn China’s strongest leader in five decades into a Trump supplicant, desperate for a “Mar-a-Lago accord," is laughable.
The point here isn’t to defend Xi. There are scores of reasons to criticize Beijing’s designs on Taiwan, bullying in the South China Sea, poor labor standards, and deflation-exporting overcapacity troubles. But Trump’s tariff gambit is ripped from the pages of the 1980s, while China strategizes for the 2030s.
Japanese negotiators must be feeling a sense of déjà vu as Trump borrows from Tokyo’s ultralow rate and weak currency strategy. Along with browbeating the Fed to ease, Trump wants a weaker exchange rate for a trade advantage over Asia. But why should Japanese Prime Minister Shigeru Ishiba make trade concessions if Trump might soon devalue the dollar? Or morph the Fed into another PBOC?
Tokyo has 1.1 trillion reasons to worry about Trump trashing the dollar—that is how many dollars worth of U.S. Treasuries the Bank of Japan holds as it braces for the next time trade advisor Peter Navarro sells Trump on a bonkers policy gamble. (China has $760 billion of exposure).
Japanese heads are spinning, too, over the Trump administration prodding Tokyo to lower automobile safety standards so that Detroit can sell more cars in Japan. It’s a nutty idea. Embarrassing, too. Japanese people don’t want cars made in the U.S.; they believe local ones to be of higher quality.
Trump’s backward thinking is a boon for Xi’s party, which is using today’s chaos to position China as the stable economic partner and protector of globalization that the U.S. once aspired to be.
Taking a wrecking ball to the Fed might just hasten this changing of the guard. By scheming to sideline Powell, Trump is taking one of his biggest kicks yet. Too bad the goal will go to China—again.
About the author: William Pesek is a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Barron’s and Bloomberg and the author of Japanization: What the World Can Learn from Japan’s Lost Decades.
Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com.
