World leaders aren't taking Donald Trump's trade barbs lyingdown.

After the U.S. president said Germany and Japan are gamingforeign-exchange markets to win favorable trade terms,Japanese Prime Minister Shinzo Abe joined German Chancellor AngelaMerkel on Tuesday in pushing back and leading a globalcounter-charge to the accusations.

“A massive clash is starting to emerge with Trump willing to getinto major geopolitical spats with China and other countries toadvance his 'America First' agenda,” Mark Leonard, director of theEuropean Council on Foreign Relations, said in a phoneinterview.

The sparks that have dominated the initial days of Trump'spresidency have set the stage for increased tensions over globaltrade and currency regimes. Decades of economic ties are atstake. Signs that the U.S. will favor bilateral trade agreements atthe expense of multilateral deals have forced world leaders todefine their own red lines, and forge new alliances.

Trump has already shown that he can shift swiftly from campaigntweet to U.S. policy, opening an early front with Mexico in a pushto impose a tax on imports from there to pay for a border wall.That means no one can afford to take his threats lightly.

Abe told parliament that it's inaccurate to say that Japan isdevaluing the yen, and that he would explain Japan's monetarypolicy to Trump if necessary. He'll get a chance to do so when hemeets Trump in the U.S. next week. Trump had said on Tuesday thatChina and Japan “play the money market, they play the devaluationmarket and we sit there like a bunch of dummies.”

Merkel rejected a charge from Peter Navarro, the head of theWhite House National Trade Council, in the Financial Times thatGermany's excessive trade surplus is a sign of a “grosslyundervalued” currency. The euro's exchange rate was the province ofthe European Central Bank and the German government had long upheldthe ECB's independence, Merkel told reporters in Stockholm onTuesday.

'Strive to Trade'

“We strive to trade on the global market with competitiveproducts in fair trade with all others,” said Merkel, who iscampaigning for a fourth term while presiding over the Group of 20countries this year on a platform of free trade. She plans to hostTrump at a G-20 summit in July, two months before Germany'selection.

As the trade barbs grow, so do new alliances. Merkel and ChinesePremier Li Keqiang last week talked by phone and spoke out in favorof closer trade ties, signaling a global pact opposed to Trump'sprotectionist agenda.

“Trump thinks in very zero-sum terms about winners and losers,but international trade is not about win-win,” Leonard said. “If heends up precipitating a global recession and destroying a lot ofjobs, he could end up with a Pyrrhic victory.”

The next international gatherings may prove an opportunity forTrump. If his administration intends to take its trading partnersto task on the subject of currency manipulation, real or imagined,a conventional forum to do that would be the G-20 meeting offinance ministers and central bank governors scheduled for March17-18 in Baden Baden, Germany.

The G-20 has stressed in recent years the importance of avoidingcompetitive currency devaluations, though members have struggled todraw the line between clear manipulation and the foreign-exchangeeffects of central bank policy. On the sidelines of the G-20meeting in Shanghai a year ago, the Bank of Japan's unprecedentedstimulus emerged as a source of worry for other nations.

'Ignore or Correct'

Even as they defend their policies, leaders should be carefulnot to overplay their hands, said Klaus Baader, chief Asia-Pacificeconomist at Societe Generale SA in Hong Kong.

“How many times did Trump say he would label China a currencymanipulator on his first day in office? It was pure rhetoric,”Baader said. “It's like many things that are coming out of theWhite House. Rhetoric that cannot be implemented.”

And while the greenback fell at least 1.9% in January againstall major developed peers, it's still up from election day.

“The paradox for President Trump is that his actual policies,such as fiscal stimulus, the border adjustment tax and a homelandinvestment act, are positive for the dollar,” said AthanasiosVamvakidis, head of G-10 foreign-exchange strategy at Merrill LynchInternational in London. “As long as the U.S. data remainsstrong, the Fed will be tightening, which is also dollarpositive.”

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