China’s woes make Plaza Accord 2.0 less outlandish
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 16 (Reuters Breakingviews) -Imagine the scene. It is September 2025, and U.S. President Donald Trump and his Chinese counterpart Xi Jinping emerge from the former’s palatial mansion into the Florida sun to announce the “Mar-a-Lago Accord”. Forty years after the United States and its trade adversaries signed the Plaza Accord in New York’s Plaza Hotel to sanction a concerted devaluation of the dollar, the world’s two superpowers agree to let the yuan appreciate against the U.S. currency.
Fantasy geopolitics? It certainly looks like that. After all, Trump may lose to his Democratic opponent Kamala Harris in the November presidential election. Even if he wins, Chinese policy advisers have long blamed the Plaza Accord for bursting Japan’s asset bubbles that scarred the world’s fourth-largest economy for decades. The economics also seem off: a weaker dollar could restoke fears about U.S. inflation, while a stronger yuan would hurt China’s fragile economy by hitting exports.
But Trump, who ironically used to own the Plaza Hotel after it had made history, may have a way to get Xi to come to Mar-a-Lago to talk currencies: he has threatened crippling levies on all Chinese imports if he returns to the White House. This is a well-trodden path. The first Trump administration’s tariffs on Beijing’s exports in 2018 and 2019, later confirmed and extended by his Democratic successor Joe Biden, have led to average tariffs of 19% on almost 70% of China’s exports. A further round of even broader import levies would cause more severe damage.
Trump’s main problem is that he wants to both penalise China’s exports and weaken the dollar. Those twin objectives are difficult to achieve at the same time. The greenback is now close to all-time highs touched in the 1980s against a trade-weighted basket of developed countries’ currencies, according to Goldman Sachs analysts. Tariffs would cause inflationary pressures and force the Fed to keep rates high, which in turn could add to the dollar’s strength. A further rise in the currency would negate Trump’s pledge to make U.S. manufactured goods more competitive overseas.
Scott Bessent, a possible Trump pick for treasury secretary, said in a Bloomberg interview that Trump’s tariff threat ought to be viewed as a “maximalist negotiating position” to pursue a weak dollar policy. Analysts at China-based CITIC Securities agree and told clients in a note last month that a new Trump administration was likely to push for a “Plaza Accord 2.0” to devalue the dollar.
The key question, however, is how receptive Xi would be. A strong domestic currency seems hard to swallow for a country so dependent on exports. And unlike Japan’s roaring 1980s, China’s economy is in a wobbly state, struggling to meet the official target of 5% GDP growth this year. A 10% appreciation of the Chinese yuan could reduce export growth by around 5 percentage points, equivalent to a 0.75 percentage points GDP growth drag, Goldman Sachs reckons.
But prohibitive tariffs could hurt more. UBS analysts calculate that the 60% tariffs floated by Trump would slow China’s GDP growth by 2.5 percentage points over the subsequent 12 months.
There is also the stigma of the historical precedent. Chinese political elites have long studied Japan’s economic mistakes, and the Plaza Accord has always been cast in a negative light. As early as 2010, Xi, then China’s vice president, asked scholars at the Central Party School to research the Japanese real estate crash in the 1990s, according to the Financial Times.
Yet currency appreciation wasn’t the direct reason why Japan’s economy grounded to a halt years after the Plaza Accord. Exports in inflation-adjusted terms still grew in the five years after the agreement, while the current account surplus fell by only 2 percentage points of GDP, according to the International Monetary Fund. Instead, it was Japan’s excessive monetary and fiscal easing and prior bank deregulation that led to the formation, and subsequent bursting, of Japan’s large asset bubbles, the IMF found.
Admittedly, these loose policies were meant to offset the economic shocks of a rising yen. But Japan, being a friendly U.S. ally, also willingly went far beyond a secretly agreed goal of a 10% appreciation. By 1986, the yen had risen nearly 50% against the dollar.
China is in a very different situation. Beijing has already deflated a property bubble and tried to reduce risks and leverage in the financial system. Policymakers may have more appetite for a stronger yuan because that helps boost investor confidence, but at the same time the People’s Bank of China tightly watches over the currency with capital controls in place, and Washington’s ties with Beijing are not as cozy as the ones with Tokyo before the Plaza Accord.
Some Chinese companies could actually benefit from a more robust yuan. From electric vehicles and batteries to solar panels, manufactures have been forced to lower prices aggressively because Chinese consumers – battered by a real estate slowdown – are reluctant to spend. Weak domestic demand makes it even more imperative for these companies to turn to overseas markets.
But ever-cheaper Chinese exports beget more trade tensions and tariffs, not just from Trump. Politicians from Brussels to Brasília have announced or are looking at similar measures. To cushion those blows, the likes of electric-vehicle maker BYD 002594.SZ are setting up supply chains in or near places like the European Union and the United States. A stronger currency would not only make those investments cheaper, but ultimately help rebalance China’s massive trade surplus – which amounted to over $800 billion, or nearly 5% of GDP in 2023.
The biggest hurdle to a Mar-a-Lago Accord, is, of course, the optics. Xi would not want to be seen as caving to Trump’s pressure. While such a deal remains a long shot, if Trump and Xi could find a way to ease trade tensions and serve their respective political interests, fantasy geopolitics may become reality.
Follow @ywchen1 on X
CONTEXT NEWS
U.S. presidential candidate Donald Trump defended his proposals to dramatically increase tariffs on foreign goods, in an interview with Bloomberg on Oct. 15 at the Economic Club of Chicago. “We’re going to bring companies back to our country,” he was quoted as saying.
Trump, the Republican nominee, has floated the idea that he will impose tariffs on both U.S. allies and adversaries, including a 60% levy on imports from China and 10% duties on goods from the rest of the world.
High US interest rates have weighed on the yuan https://reut.rs/3NrkKib
The United States has a huge trade deficit with China https://reut.rs/40apH6H
Editing by Francesco Guerrera and Streisand Neto
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