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“Some time in the next couple of weeks, we think it is likely that President Trump will declare China a currency manipulator and propose penalties if it does not enter into negotiations to lower its trade surplus with the US,” the team led by Michael Spencer, chief economist at Deutsche Bank, wrote in a note to clients last week.
“This has been a consistent campaign promise and he has demonstrated since taking office his determination to deliver on his promises, however controversial,” the bank’s note read.
“Existing US law and its application by the Treasury in recent years are unlikely to satisfy the President’s desire for strong penalties for unfair trade, so we anticipate that the proposed measures could go far beyond what has thought possible even a few weeks ago,” the bank’s note read.
China, the world’s 2nd-biggest economy behind the United States, has been trying to control the rate of its currency’s depreciation since Y 2014, and it has had a harder time keeping it stable in trade-weighted terms since mid-2016.
The US has not declared China a currency manipulator since Y 1994.
The Big Q: If Trump does label China a ‘currency manipulator’ how will China respond?
The Big A: “In the trade policy realm, the authorities have signaled that they’ll respond with tariffs in proportion to the US move. So a sector-by-sector application of anti-dumping tariffs, for example, will likely be met by a similar response from China. An across-the-board tariff on all imports from China would likely be met by a similar response on the Chinese side,” the Deutsche Bank note read.
“But we think China’s currency policy is unlikely to change materially in the event it is labeled a currency manipulator. We do not expect them to refrain from intervening and move to free float — which would likely lead to a large depreciation — nor would we expect a one-off devaluation. The authorities have had three years to allow a large sudden depreciation and even the modest 3% devaluation in August 2015 seems to have been too much volatility for them. At most, a controlled depreciation such as we observed in the first half of 2016 would be possible, in our view,” the Deutsche Bank note read.
Some trade analysts wonder if President Trump is using the tariff threat as a negotiating tool to win concessions from China.
Whatever the US motive, China has a consistent record of retaliating against trade sanctions.
China’s Global Times newspaper, published by the ruling Communist Party’s People’s Daily, has already speculated that “China will take a tit-for-tat approach” if Trump’s tariffs are enacted. The paper suggested that Beijing might limit sales of Apple iPhones (NASDAQ:AAPL) and Boeing (NYSE:BA) jetliners in China.
“The Chinese are predictable and reliable. If they get punched, they punch back.”
When a country is accused of currency manipulation, it can kick off a dispute at the World Trade Organisation (WTO) or the International Monetary Fund (IMF) as both bodies try to arbitrate to keep trade open and fair.
The political fallout and the possibility of retaliation are more immediate concerns.