Trade Wars

The most recent reports concerning the current trade war between China and the US indicate that negotiations have been broken off but will continue nonetheless. President Trump has applied a 25% tariff on Chinese goods that were previously subject to a 10% tariff. This is clearly an intensification of the pressure put on China.

         It seems that President Trump has not understood that dealing with Asians is not the same as dealing with Americans. The Chinese are determined not to lose face. This is clear from Point 3 of the conditions communicated by the Chinese. Both sides must have a dignified exit from the talks. Trump`s tactics do not seem to have had the desired effect as the Chinese are not caving in and agreeing to everything demanded by the Americans.

         The markets have been reacting to news about the negotiations with the result that volatility has returned. The recent negative results for the S&P and the DJIA indicate that the markets have taken note of the lack of progress in the talks. The renminbi has also suffered a decline as the rate of exchange is marked by weakness in the Chinese currency in relation to the US dollar. One US dollar is now worth 6.8619 yuan as of 13 May 2019.

         It may be worthwhile to examine how yuan weakness may influence trade with the US. Depreciation of the yuan in relation to the US dollar will have results that President Trump may not be happy with. A weaker yuan will mitigate the effect of the imposition of tariffs on Chinese goods. At the same time an increase in the price of Chinese goods that is only moderate will not significantly reduce the amount of Chinese goods imported into the US. A weaker yuan will reinforce Chinese export industries and make it easier for the Chinese to penetrate foreign markets.

         A stronger US dollar will make it more difficult for American firms to market goods globally. It will also make it more difficult for borrowers that have US dollar denominated debt to service their debts as well as to repay the capital when the debt, be it a bond or a loan, matures. In this sense a strong US dollar will further weaken the global economy that has shown poor growth and called forth warnings from the IMF that the global economy is not in good health due to excessive debt. According to this analysis, the China-US trade war will have a negative influence on the economy. Investors should not be complacent.

Walter Snyder


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