Published on Jan 27, 2026 • Updated on Oct 6, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminaries Award Winner | 2026 Wealthies Finalist, Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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The world is spiraling toward a full-blown trade war.
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.
And while the pause for negotiations is a welcome sign, countries aren’t going to sit still and just cave. Even with a 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.
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.
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.
Thus, it can quickly turn into an economic race to the bottom (for instance, a currency war broke out during the late 1920s to 1930s and played a role in World War II).
Let’s look at a simple example:
Say a camera costs 100,000 yen in Japan.
Nothing changed in Japan. But the price fell in dollar terms. That makes Japanese exports more competitive.
Thus, once a country weakens its currency:
Exports become cheaper, helping domestic manufacturers.
And there’s a third effect many overlook. . .
| Step | Example | Effect |
|---|---|---|
| Original export price | A Japanese camera costs 100,000 yen. At 100 yen per dollar, it costs a U.S. buyer $1,000. | The dollar price reflects the original exchange rate. |
| Tariff imposed | The United States applies a 10% tariff. | The camera’s landed price rises to $1,100, before any currency move. |
| Exporter’s currency weakens | The yen moves to 110 yen per dollar, while the yen price stays at 100,000. | The camera’s dollar price falls to about $909. |
| Tariff applied after depreciation | A 10% tariff applies to the lower dollar price. | The post-tariff price is about $1,000. |
| Real-world result | Exporter prices, contracts, margins, shipping costs, and pass-through can all change. | Currency depreciation may offset part, all, or none of a tariff’s effect. |
That’s what we may be seeing now.
China is the world’s largest exporting economy – and greatly depends on its manufacturing sector for growth (especially now that it’s going through its 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.
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.
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:
It’s a global pushback. But the U.S.-China standoff still grabs the headlines.
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.
It certainly looks like it. Or - at least - the authorities aren't stopping it.
To highlight this, remember, the Chinese yuan has two versions:
Both these currencies are sliding.
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.
Now, suppose China allows the yuan to depreciate by 10%.
Put simply, a roughly 9.1% fall in the exporter’s dollar price offsets a 10% tariff because the tariff is applied to the lower price.
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.
Devaluing your currency might help exports. But it can backfire in a few ways:
Currency wars have happened a few times before, and they usually lead to more geopolitical tension.
For example:
During the early Great Depression, the U.S., U.K., and France all devalued their currencies to try and boost exports.
After 2008, the U.S. and Japan used quantitative easing (QE) to help weaken their currencies.
In August 2015, China devalued the yuan by 2%. And while that may not seem like a lot, it reverberated across the world.
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:
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.
How exactly does currency devaluation cancel out a tariff? If a $100 Chinese product faces a 10% U.S. tariff, it costs the buyer $110. Let the yuan slide 10%, and that same product converts to about $90.91 before the tariff. Add the 10% tariff back in, and the price lands right back near $100, basically wiping out the tariff's bite.
What's the difference between the onshore and offshore yuan, and why does it matter for the trade war? China runs two yuan markets. The onshore yuan (CNY) trades inside mainland China under tight central bank control. The offshore yuan (CNH) trades in places like Hong Kong with fewer restrictions. Both have weakened sharply together, and that parallel slide suggests Beijing is tolerating a weaker currency rather than defending a fixed rate.
Did China's 2015 yuan devaluation actually cause a global market crash? In August 2015, China devalued the yuan by just 2%, and global stock markets still fell sharply while commodity prices dropped. Investors took the move as a sign China's economy was weaker than official numbers let on. That shock helped fuel the tariff-heavy rhetoric that shaped the 2016 U.S. election cycle.
Were the 1930s currency devaluations really "competitive," or is that a myth? Dozens of countries left the gold standard and devalued between 1929 and 1936, and global trade did collapse during that stretch. But whether they were actually racing each other down is disputed. A 2022 study found little hard evidence of that "beggar-thy-neighbor" dynamic, while other research still points to real retaliatory trade penalties tied to the devaluations.
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