A currency front in the U.S.-China trade war

Nearly two years after Office of the U.S. Trade Representative (USTR) began investigating China over IP concerns and 11 months after the bulk of tariffs went into effect, President Trump announced a tariff of 10 percent on some US$300 billion of Chinese exports—upping the ante from previously threatened tariffs of US$250 billion of export in addition to those already in place on another US$250 billion of exports. If the new tariffs go into effect in September, effectively all U.S. imports of Chinese goods would be subject to tariffs.

Significantly for ag markets, the Chinese government has confirmed a halt in purchases of U.S. agricultural goods and threatened additional tariffs on U.S. goods. According to The Hill, U.S. ag exports to China could fall from US$22 billion in 2016/17 to a projected US$6.5 billion in 2018/19.

American Farm Bureau (AFB) released this statement: “China’s announcement that it will not buy any agricultural products from the United States is a body blow to thousands of farmers and ranchers who are already struggling to get by.” AFB estimates China’s imports of U.S. farm produce at US$19.5 billion in 2017, falling to US$9.1 billion in 2018 and down another US$1.3 billion in the first half of 2019.

Total U.S. aid expenditures for farmers could run to US$26 billion through this year, which ironically could leave the U.S. open to challenges under WTO limits on this sort of support.

On Friday, Aug. 2, China’s renminbi (RMB) teased a close above the psychologically significant exchange rate of seven to one against the U.S. dollar (US$0.1439 per RMB). Over the past decade, the Chinese government appeared to keep that level as a figurative red line. On Aug. 5, the RMB closed below that seven-to-one level (US$0.1466 per RMB), its lowest level to the dollar since March 2008.

U.S. Treasury has officially labeled China a currency manipulator, a move that President Trump had promised while still a candidate. While the move is mostly symbolic, BBC’s Michelle Fleury wrote: “Nobody thinks this will increase the odds of a compromise by the Chinese side when it comes to trade.” The Chinese government subsequently moved to support the RMB and reassure markets. A weaker RMB would support the competitiveness of Chinese goods—at the risk of inflation and further encouraging capital flight. The official line is that the government would not make “competitive” devaluations of the RMB.

Renminbi vs. U.S. dollar, weekly history


Source: DTN, McKeany-Flavell
Posted by: Information Services
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