As the US and China get ready to sign the much-anticipated phase one deal on Wednesday, Washington has dropped its designation of the People’s Republic as a “currency manipulator”. International economic observers explained what’s behind the move and who benefitted the most from longstanding trade frictions.
On 13 January, the US Department of Treasury announced that China should no longer be designated as a currency manipulator, giving a boost to China’s currency and sending it to its strongest level since July.
“China has made enforceable commitments to refrain from competitive devaluation”, Treasury Secretary Steven Mnuchin announced on Monday, adding that phase one deal includes commitments to avoid competitive devaluation.
Washington officially labeled China as “currency manipulator” in August 2019 amid growing tensions between the two major global economies since the People’s Republic was believed to deliberately weaken the yuan against the dollar.
Treasury’s Move as “Icing on the Cake” of Phase One Deal
“The yuan had depreciated from 6.3 to 7.2 yuans/dollar since early 2018 to last summer, but since then it has appreciated to around 6.9 yuans per dollar”, explains Antonio Moreno, professor of economics and finance at the University of Navarra, Spain. “Overall this can be seen as a step towards less trade tensions and reducing overall global economic uncertainty”.
According to the Spanish academic, the de-escalation of trade tensions between the US and China “should have a positive effect in both economies”. Furthermore, this “should be seen in a political economy context”, Moreno specifies, suggesting that “the US likely wants to create a smooth global economic environment to avoid falling into a recession” ahead of the 2020 presidential elections.
Nevertheless one still have to wait for “the final details of the phase one agreement and also beyond, as phase two issues become more evident”, he added.
Dr Ei Sun Oh, a senior fellow at the Singapore Institute of International Affairs, says that the US Treasury’s recent decision to reverse China’s designation as currency manipulator “appears to be part of a package trade deal with China“.
He notes, that the months’ long designation “did not seem to have a significant impact upon China’s monetary or exchange policies“, presuming that its reversal is largely symbolic and will become the “icing on the cake” for the much more important trade pact between Washington and Beijing.
“As China’s economy slows down in recent years, it is only to be expected that its currency value would depreciate in tandem, both on a natural course and as a matter of necessity to boost its exports which suffer further due to the ongoing trade war”, the researcher emphasises.
Who are the Largest Beneficiaries of Trade War
Donald Trump resorted to an all-out trade war tactics in March 2018 citing an over $300 billion trade deficit with China. Nearly 18 months the two countries exchanged tit-for-tat tariff measures before reaching an apparent compromise by mid-December 2019.
Dr Ei Sun Oh says that not only were US rivals, like China, subjected to higher taxation but also Washington’s strategic allies such as Japan and Europe. When Trump’s “trade opponents” refused to yield to his demands, he stepped up the tariff pressure “to force them to show their hand at the negotiating table”, the scholar notes adding that “the largest beneficiaries of the trade war appear to be some emerging markets such as Vietnam, to where many factories relocate from the tariffs’ targeted countries”.
He draws attention to the fact that during this period American domestic production and jobs creation also increased. The scholar added, that “they have been on an upward trend even before the trade war started”.
“The major factors for the American economic upswing are not so much the high tariffs, but the huge reduction in American business taxes pushed through by Trump early on in his term, as well as the major scaling back of environmental regulations”, the researcher added. “It remains to be seen if this trade deal would indeed bring about a further American economic revival”.
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