Tension between the US and China is not merely a trade war but political confrontation. The world is facing instability and chaos due to escalating tension between the two big economies.
Repeated retaliations
Trump’s decision to slap a 10% tariff on $300 billion of Chinese goods since September 1st is the drop of water that made the vase overflow. It’s the 1st time in a decade China has weakened its currency, the yuan, to the lowest point, to drop against the USD dollar by 2%. It means that a dollar can buy 7 yuan. The devaluation makes Chinese goods cheaper for foreign importers and helps compensate local businesses from impact of Trump’s additional tariff. The Chinese government has asked its state-owned enterprises to suspend purchases of US agricultural products.
Immediately, the Trump administration designated China a "currency manipulator" and planned to work with the IMF to hamper unhealthy competition from Beijing. The US Treasury Department said China’s move violates a G20 commitment on not devaluating its currency. Trump’s labeling China “a currency manipulator” was avoided by previous presidents, who considered it a serious escalation in bilateral ties.
Negative impacts on the US, Chinese, and global economy
The US, Chinese, and global economy was immediately affected by the tension escalation. The US stocks got clobbered on Monday in the biggest rout of the year as trade tensions between the US and China intensified. Investors frantically dumped technological, industrial, and consumption shares. China’s yuan devaluation is predicted to put pressure on the FED to consider more interest rate cut.
Chinese businesses are expecting losses including property and heavy industry companies, who are borrowing big loans in USD. It could also hurt companies that depend on commodities, such as oil, that are evaluated in USD.
The world’s economy will be significantly damaged. Stock indexes in Asia and the EU have plunged. The exchange rate of 1 USD per 7 yuan is a red line for international markets which can ignite negative response from investors. East Asian and Southeast Asian countries that are competing with China in the same commodities will be forced to weaken their currencies. It can lead to higher inflation, reduce family consumption, and enable unusual cross-border money circulation. More tariffs and protective measures are expected.
The Grant Thornton said on Monday that no matter how the conflict ends, trade patterns in the region are likely to change permanently. This requires businesses to grapple with the challenges of supply chain disruption, transformative technology, and the increase in regulations and compliance that can bar access to new markets.