September 16, 2019

The Chinese-American Currency Game

“CAMBRIDGE – The trade war between the United States and China is heating up again, with US President Donald Trump abruptly announcing plans to impose a 10% tariff on the $300 billion worth of imports from China that he had so far left untouched. The Chinese authorities then allowed their currency, the renminbi, to fall below the symbolic threshold of CN¥7 per US dollar. The Trump administration promptly responded by naming China a “currency manipulator” – the first time the US had done that to any country in 25 years. Pundits declared a currency war, and investors immediately sent global stock markets lower.

The US assertion that the recent depreciation of the renminbi amounts to currency manipulation is not true. It would be more correct to say that the Chinese authorities gave in to market pressure – the immediate source of which was none other than Trump’s announcement of the new tariffs.

Economic theory says that tariffs do not improve a country’s trade balance in the way their proponents think they do. When an exchange rate is market-determined, it automatically moves to offset the tariff. Intuitively, if tariffs discourage American consumers from buying imported Chinese goods, then demand for renminbi weakens, and the currency’s price falls.”

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