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US and China Escalate From Trade War to Currency War

Ryan Connelly, August 8, 2019

DuckerFrontier recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition highlighting the latest developments in the US-China trade war.

Key Takeaways
  • On August 1st, President Donald Trump threatened to impose tariffs on all remaining Chinese imports at a rate of 10%, starting September 1st.
  • Trump and President Xi Jinping agreed in late June to restart trade talks, with China promising to increase US agricultural purchases and the US promising to ease restrictions on Huawei.
  • Reporting suggests that the first round of fresh talks did not go well and US negotiators were unhappy with the lack of an increase in Chinese purchases of US agricultural goods.
  • Chinese officials retaliated by announcing the suspension of all US agricultural purchases and allowed the Chinese yuan (CNY) to depreciate past the significant psychological barrier of 7.0 (see next story).
  • In response, the US Treasury officially declared China a currency manipulator for the first time in 25 years. This move carries no immediate punitive measures.

Our View

The past weeks’ events mark a clear escalation of the trade war. Additional tariffs will hit low margin consumer goods that will be felt directly by consumers. This will increase the risk of a 2020 US recession and generally hurt Trump’s reelection chances. Though Trump’s threat to impose additional tariffs is credible, we believe that his strategy has backfired in this case. Trump’s goal was to get China to restart agricultural purchases. Instead, China allowed the CNY to depreciate past 7.0, clearly signaling to the US that it would use the currency as a retaliatory tool if the US continued to impose tariffs.

Business Implications

The risk to the global outlook for 2020 was already high, but if neither party seeks to deescalate tensions, the likelihood of a significant global slowdown will increase substantially. Investment growth has already been weak, with slowing global PMIs, and additional uncertainty could lead to an investment-led contraction. Firms need to approach their 2020 plans cautiously, prepare for a weaker CNY, and continue to plan for a gradual decoupling of US-China supply chains and bilateral flows of goods, services, technology, and individuals in sensitive roles.

Ryan Connelly, Practice Leader for Global Economics and Scenarios

FrontierView clients: See our most recent US-China LiveView dashboard to stay up to date

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