TWN Info Service on WTO and Trade Issues (Aug19/02)
9 August 2019
Third World Network

China has upper hand after being labelled currency manipulator

Published in SUNS #8962 dated 7 August 2019

Geneva, 6 Aug (D. Ravi Kanth) – China appears to have an upper hand in holding out longer than the US in the worsening US-China trade war, which is rapidly becoming a full-fledged economic war after Washington’s designation of China as a currency manipulator on Monday.

“In terms of time frame, I would argue China has greater pain tolerance,” says Eric Robertsen, head of global macro-strategy at Standard Chartered Bank, in an interview with CNBC on 2 August.

“I don’t think Beijing is going to really respond to this name-and-shame approach by the Trump administration …. I think this, in and of itself, is an empty threat,” Stephen Roach, a former investment banker and now an academic at Yale University, told the CNBC “Squawk Box” on 6 August.

If the US continues to escalate further on the tariff front or impose any other sanctions on China, “they have plenty of options to consider as the recent move in the bilateral exchange rate demonstrates,” Roach maintained.

China could also harden its stance at the multilateral trade front by fiercely opposing the US move to deny special and differential flexibilities to China and other major developing countries such as India at the World Trade Organization, said a trade envoy, who asked not to be quoted.

Over the past several months, China seems to have softened its stance on several issues, including the fisheries subsidies negotiations where China has proposed a stand-still agreement on the lines of the US-Australia proposal.

With the worsening bilateral trade negotiations after 12 rounds of trade talks, China could adopt stronger positions on the fisheries subsidies negotiations.

The US along with the European Union and Japan want to bring new disciplines on industrial subsidies, mandatory transfer of technologies, and stringent transparency and notification procedures against China at the WTO.

After China allowed the yuan to fall below the 7 yuan to the dollar benchmark for the first time in over a decade, the US promptly designated China as a currency manipulator on 5 August on grounds that a weaker yuan will help Chinese exporters.

The yuan, however, stabilized on Tuesday, supported by signs that Beijing might not permit a steep depreciation, according to the Wall Street Journal of 6 August.

The US dollar was weaker against major currencies, including the euro and yen, but it was higher by 1.5% against the Chinese yuan.

China also announced on Tuesday that it is going to halt all purchases of US agricultural goods by its state- owned enterprises. China threatened that it would impose additional tariffs on US farm products purchased after 3 August.

China’s ministry of commerce held President Trump responsible for the escalation of trade measures that “seriously violated the consensus reached by the US and China” at the G20 meeting in Osaka.

In response to President Trump’s decision on 1 August to impose an additional 10 percent tariff on $300 billion worth of Chinese goods on grounds that he remains dissatisfied by the lack of progress in trade talks, China also resorted to tit-for-tat trade measures, simultaneously, sending a signal that it will stand up to every measure imposed by President Trump.

Global markets went into a tailspin on Monday as the yuan became the latest flashpoint in the escalating war of trade and economic nerves. The Dow Jones fell by 750 points on Monday following the drop in the yuan.

The US Treasury Secretary Steven Mnuchin, who is reckoned to be a China-dove all these days, “announced that he has determined China is manipulating its currency to gain an unfair trade advantage – something President Trump argued earlier in the day on Twitter.”

“China dropped the price of their currency to an almost a historic low,” the President wrote.

“It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”, President Trump tweeted on Monday.

Immediately, the US Treasury Secretary announced that “in recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past.”

“The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade,” the US Treasury Secretary maintained.

But the designation of China as a currency manipulator has only a symbolic value and does not pose any immediate consequence for China.

Under the US law, the Treasury Secretary is required to initiate negotiations with China and simultaneously engage the International Monetary Fund to eliminate China’s unfair competitive advantage.

“This justification provides political cover since the currency manipulation charge has long been levelled at China by Chuck Schumer, the top Senate Democrat, and other Democrats,” according to Eswar Prasad, an academic at Cornell University.

Although the US President repeatedly maintained that the US consumers have not been affected from the tariffs that he has already imposed on China and that the Chinese had to pay billions of dollars because of the tariffs, Trump said that Beijing’s manipulation of its currency keeps the cost of Chinese goods low.

However, China’s decision to terminate its purchases of US farm products is another strike at US farmers already staggering under the combination of retaliatory tariffs and bad weather, according to Washington Trade Daily (WTD) of 6 August.

According to WTD, American Farm Bureau Federation President Zippy Duvall called China’s announcement “a body blow to thousands of farmers and ranchers who are already struggling to get by.”

“In the last 18 months alone, farm and ranch families have dealt with plunging commodity prices, awful weather and tariffs higher than we have seen in decades.”

According to US Farm Bureau economists, exports to China were down by $1.3 billion during the first half of the year.

“Now, we stand to lose all of what was a $9.1 billion market in 2018, which was down sharply from the $19.5 billion US farmers exported to China in 2017,” he said.

According to analysts at Goldman Sachs, the leading investment bank, the prospects for an agreement between the US and China are bleak.

“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less confident that this is his view,” Goldman’s analysts maintained, according to a report in the CNBC on 6 August.

In short, the US-China trade war seems to have put paid to any bilateral or multilateral cooperation between the two largest economies.

[In an opinion column in the New York Times, under the title “Trump’s China Shock”, economic Nobel-laureate Paul Krugman wrote on 5 August that “while there are many valid reasons to criticize Chinese policy, currency manipulation isn’t one of them. China was a major currency manipulator 7 or 8 years ago, but these days if anything it’s supporting its currency above the level it would be at if it were freely floating. And think for a minute about what would happen to a country with an unmanipulated currency, if one of its major export markets suddenly slapped major tariffs on many of its goods. You’d surely expect to see that country’s currency depreciate, just as Britain’s has with the prospect of lost market access due to Brexit.

[“In other words, the Trump administration in its wisdom has managed to accuse the Chinese of the one economic crime of which they happen to be innocent. Oh, and what are we going to do to punish them for this crime? Put tariffs on their exports? Um, we’ve already done that. So how does this all end? I have no idea. More important, neither does anyone else. It looks to me as if both Trump and Xi have now staked their reputations on hanging tough … it’s hard to see what would make either side give in …. At this rate, we may have to wait for a new president to clean up this mess, if she can.” SUNS]