Since China offered a truce in the trade war last October following its threat to deprive the United States of rare-earth magnets, the Trump administration has been happy to stop escalating. After all, imports from China have been falling, down by 40% in the year to June, compared with the same period in 2024. Best to declare victory and call it a day. This was reported by Qazaqyia.kz citing The Guardian.
But the US hasn’t won this battle – and there’s strong evidence to show it’s too chicken to really try.
Last week the White House was forced to accept that not buying Chinese stuff from China is not equivalent to not buying Chinese stuff. While China’s share of US imports has fallen pretty dramatically, its share of the total value added in US imports has not.
Trade adviser Peter Navarro was in a huff on Thursday, furious about Chinese motors bolted on to recliners imported from Vietnam. He cited an analysis by the commerce department that concluded $67bn of goods from China were transhipped through Mexico, India and Vietnam in 2025.
The White House released a report, The Great Transhipment Scam, which lamented that “when power supplies, control panels, aluminum sheet, valves, plastics, or furniture components are rerouted from China through Mexico, Vietnam, Malaysia, Poland, or the UAE, they destroy or reduce jobs in Milwaukee, Cleveland, Toledo, Hickory, Phoenix, Youngstown, and dozens of other American manufacturing communities”.
It unveiled a new tool to engage in a globe-spanning game of Whac-A-Mole: an AI-powered border “detective” that “never sleeps, never tires, and never forgets” to scan every bill of lading and shipping manifest, ID rerouted stuff, and punish the perpetrators.
It goes without saying that the new detective will not restore factory jobs to Toledo, Hickory or Phoenix. Despite strenuous efforts to boost manufacturing employment over two and a half administrations spanning 10 years, it remains roughly in the same place as when Trump first came into office.
Cracking down on rerouted imports won’t dent the US import bill either. Despite Trump’s many tariffs, it is running higher than in 2024. And it looks unlikely to do much harm to China, whose exports have kept growing despite US efforts to squeeze them out.
But what is most perplexing about the White House’s resort to AI sleuthing, though, is that the US possesses a more straightforward tool to achieve its aims, one which directly addresses a critical driver of China’s massive exports, which are not only swamping the US but also threatening industrial development around the world: the undervalued Chinese yuan. Dealing with its undervaluation can do much to rein in China’s overwhelming exports.
Some economists will complain about this take. There are fundamental reasons for China’s huge trade surplus, mainly its depressed household consumption, which means it needs foreign consumers to support economic growth. There are also fundamental reasons for the US trade deficit: notably, its extraordinarily large budget deficit, which must be funded by savings from abroad (read China).
It’s hard to overstate how Chinese exports weigh on the economies of the rest of the world. The yuan’s weakness, like the dollar’s comparative strength, are reflections of these dynamics. In other words, “the exchange rate is a symptom, not the disease”. If Beijing were to push up the exchange rate by fiat but did nothing else, it would slow China’s growth and reduce import prices, slow inflation (perhaps even causing deflation) and thus depress the real, after-inflation exchange rate. If, by contrast, the underlying ills were addressed, the yuan would appreciate naturally.
But give us a break. The exchange rate depends on those broad economic dynamics, sure. But the call to wait for Beijing to support household spending, say by raising meager pension benefits or some such, has the taste of those old exhortations to wait for China’s multiparty democracy to flourish. On the American side of the ledger, the last time the United States seriously tried to curb its budget deficit was in the 20th century. Pressure is needed for these things to happen. And exchange rate intervention could provide it.
It’s hard to overstate how Chinese exports weigh on the economies of the rest of the world. China’s share of global manufacturing exports has risen from 3% to 20% since 1995. It accounts for over half the global exports of hundreds of manufacturing products. Its current account surplus – equal to perhaps 5% of its GDP – is a huge drawdown on worldwide demand.
As Gene Frieda from the London School of Economics points out: “The barrier to progress is not policy design; it is policy preference.” This preference is to ensure the world’s dependence on China’s products, which it achieves via massive intervention to depress the value of the yuan.
And there is evidence for the power of exchange rates. The Plaza accord that weakened the dollar in the 1980s helped reduce the US trade deficit with Japan. China’s growing external surplus contracted sharply as the yuan appreciated following the global financial crisis. By contrast, the slide in China’s currency has underpinned a rising external surplus since 2023.
As Brad Setser of the Council on Foreign Relations points out, history suggests currency adjustment would drive the economic realignment needed to reduce China’s overwhelm.