Currency is the Perfect and Easy Weapon Against Trade Wars
In 2018, as part of their trade war, the U.S. imposed an average tariff of 12.5% on imports from China.
The direct consequence? The yuan gradually declined by a similar proportion.
Now, consider the U.S. imposing tariffs on imports from the Eurozone. For the European Union, the best defense would be inaction.
Why? Because the euro would depreciate, effectively protecting European exporters and neutralizing the protectionist effects of the measure.
This, in fact, is already beginning to unfold in anticipation. Just look at the explicit chart tracking the exchange rate since Trump’s election.
Which brings us to Eugene Fama’s famous remark, with which I agree (at least this time):
“Markets are efficient, and prices always reflect all available information.”
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