The trade dispute between the United States and China officially turned into a currency war on Monday. Washington has formally included Beijing on its currency-manipulating list to allegedly try to gain a competitive advantage. The president of the world’s largest power, Donald Trump, had already suggested this possibility in his public speeches, directly accusing Beijing of artificially devaluing the yuan. Chinese authorities responded shortly afterwards, announcing “countermeasures” that they did not detail.
The White House made its statements on Monday, less than a week after deciding to take another step in the climb by announcing that taxes would cover all imported goods from the Asian giant. It is the first time in a quarter of a century – exactly since 1994 – that the US has declared China a currency manipulator. The Treasury Department had avoided such action so far, although this option has been a possibility since the yuan’s fall in value during the last financial crisis. The value of the Chinese currency is back to 2008 levels, a fact that notably favors Beijing’s export capacity: its products gain competitiveness immediately and without the need to cheapen production.
Treasury Secretary Steven Mnuchin said in a statement that he will now ask the International Monetary Fund (IMF) to “take action to eliminate the unfair competitive advantage created by China’s latest actions.” Washington’s maneuver against Beijing could thus trigger an even greater crisis between the two countries, have severe ramifications in the global economy and hit hard the Latin American currencies, closely linked to the dollar’s evolution.
Hours before the US Administration’s move was publicized, fears that the tax battle would set off a currency war have already sparked the worst day of the year on Wall Street. The two main indices on the New York Stock Exchange, the Dow Jones and the S&P 500, closed with significant declines close to 3%, already in the two-month lows. Nasdaq, which reflects the evolution of technological values - many with one foot in the US and one in China – fell 3.5%. The red numbers have intensified after learning that, in response to new taxes announced last week, Chinese companies would no longer purchase US agricultural products as they found that the terms of the trump and Xi Jinping pact in the last G20 were violated.
Using currency as a weapon only prolongs the confrontation. There is also the circumstance that this time there is no scheduled meeting between the two leaders that can help ease the tension as it did in May, the last time the New York Stock Exchange was caught in a similar negative spiral.
Reflecting uncertainty, 10-year Treasury bond interest rates were, however, below 1.75% on expectations that Trump’s confrontational rhetoric would force the Federal Reserve to lower the price of money again in September and predictably another time in December.
A weaker yuan makes US products more expensive in the Chinese market. This has mainly affected multinationals such as Apple, which lost more than 5 percent, and industrial companies because they are less competitive against local rivals.
The Treasury is the guardian of the US dollar, not the central bank. The Trump Administration, however, can use various tools to intervene if needed in the currency market, in which case the Fed could help it sell dollars and buy currency. It is, in any case, an extreme step and the US may find itself in a position to act alone.
“China has dropped the price of its currency almost to a historic low. This is called ‘currency manipulation’. Are you listening, Federal Reserve?” President Donald Trump said on his Twitter account Monday morning. And as usual since the election campaign, he accused China of stealing the US, its companies and its employees. “Never again,” he said before the Treasury took the final step, feared by investors for its potential trigger of a global currency war.
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