President Donald Trump’s efforts to take on China may already be paying dividends. When Trump announced tariffs on Chinese imports, he immediately sparked fears of a global trade war. Such fears weren’t unreasonable, but so far President Trump’s efforts appear to be working. Speaking at a conference, Chinese Premier Li Keqiang has emphasized that China is willing to both work with the United States and make concessions.
China did level retaliatory sanctions on some American-made goods. However, the total value of these goods weighs in at only $3 billion, while the tariffs leveled against China are expected to affect $60 billion worth of trade. This measured approach suggests that China, in spite of all of its bluster, isn’t itching for a fight.
China Sets Yuan Rate at Highest in Over Two Years
So what does the United States want, and what might China be willing to deliver? First, many accuse China of manipulating its currency. By intentionally weighing the yuan down, the Chinese government can make it cheaper to buy Chinese goods. The economics are complex, but generally countries with strong economies see their currencies rise, while struggling countries see their currencies drop.
This can help smooth over global markets because as a currency drops, it spurs exports, providing a jolt for struggling countries. The United States and China both seem to skirt these general rules. As the world’s reserve currency, the U.S. dollar has remained remarkably stable even when the American economy has struggled. Meanwhile, China has kept a tight lid on exchange rates, allowing the yuan to trade only within a narrow band, and thus potentially keeping it undervalued.
China is unlikely to allow the yuan to free float in the near future. However, the government has raised the “midpoint” of the trading band to its highest level in two and a half years. Back then, China had made a surprise move to slash the value of the yuan, upsetting policy-makers worldwide.
American Firms Will Be Put on More Equal Footing
China has been a boon for American firms in many ways. Access to China’s cheap manufacturing and huge markets has allowed many corporations to generate huge profits. However, these profits are coming at a cost for American firms (and workers.)
Despite generous access to American markets and investment opportunities, China tends to guard its own markets jealously. For example, American automobiles are slapped with a 25 percent tariff, which China is now looking to lower. American automobile exports to China topped $10 billion in 2017.
Further, China has also been accused of forcing American companies to surrender intellectual property in order to gain access to Chinese markets. Essentially, in order to set up shop in the Middle Kingdom, foreign firms are forced to partner with a local partner and provide that local partner with free use of said technology.
Premier Li has pledged that going forward, foreign and domestic firms will be treated equally. Further, foreign companies will gain greater access to the Chinese financial sector as well. China has also pledged to buy more American semiconductors. On the whole, it appears that China is moving quickly and seriously to placate American furor.
Again, it’s far too soon to bust out the champagne, but perhaps the recently sinking global markets are presenting a good opportunity to buy assets on the cheap. And maybe, just maybe, Trump’s efforts to stand up to China will pay off.
This doesn’t mean that Trump’s approach has been or will prove to be 100 percent successful. Initially, Trump pushed for a go-it-alone strategy, shunning chief allies with similar complaints, such as Japan and the European Union. If China is going to be forced to play on a level playing field, it will take the combined effort of major economies across the world to rein it in.
Still, it’s long past time for the world to stand up to China, and given the recent capitulations, progress may be possible.
