The US/China trade war cooled a bit this week as President Donald Trump delayed the imposition of new 10% tariffs on $300 billion worth of Chinese goods for at least a couple of months.
That does not, however, stop the tariff war, especially after China allowed its currency the renminbi, or yuan, to slip below the benchmark of 7 yuan per 1 US dollar while halting all purchases of US agricultural products.
But the Administration’s assertion that the depreciation of the yuan amounts to currency manipulation is not true, said Jeffrey Frankel, professor of Capital Formation and Growth at Harvard University, in Project Syndicate magazine. It would be more accurate to say the Chinese gave in to market pressure and allowed the yuan to slip in value.
ECONOMIC THEORY AND EVALUATION
Frankel explained that economic theory says that tariffs do not improve a country’s trade balance in the way their proponents might think. When an exchange rate is market determined, it automatically moves to offset the tariff. So, if tariffs discourage consumers from buying imported goods, then demand for that currency weakens, and the currency’s price falls.
In evaluating whether trading partners manipulate their currency, the US Treasury Department uses three criteria, Frankel said. The first two, which also are used by the International Monetary Fund, are: persistent one-sided intervention by a country to pressure its currency and a large current-account surplus, do not apply to China currently.
There was a time when that was not the case, however, he said. From 2004 to mid-2014, particularly from 2004 to 2008, Chinese authorities intervened heavily to slow down the currency’s market-driven appreciation.
Even then, the Yuan still appreciated by 30% against the dollar over the 10-year period, peaking in 2014, Frankel said.
Then things changed. For the last five years, Chinese authorities have intervened to slow the depreciation of the currency, he said. In 2015, the Peoples Bank of China spent $1 trillion in foreign exchange reserves in an effort to prop up the exchange rate – “by far the largest intervention in history to support the value of a currency.”
WHY THE LATEST MOVE?
China’s decision to let the yuan break the 7-yuan barrier may have been a deliberate response to President Trump’s latest tariff offensive, Frankel said. China remains concerned that its currency will slide too far too fast to destabilize financial markets.
If the US were to engage in an all-out currency war with China, it would be outmatched by China’s foreign-exchange firepower, he said. Plus, traders traditionally pull into US dollars in uncertain times, something that would increase the dollar’s value, not decrease it.
CATTLE, BEEF RECAP
Cash cattle traded lightly Wednesday at $106 to $107 per cwt on a live basis, down $7 to $9 from last week, and at $170 dressed, down $11 to $13.
The USDA choice cutout Wednesday was up $5.98 per cwt at $232.34, while select was up $5.34 at $205.92. The choice/select spread widened to $26.42 from $25.78 with 95 loads of fabricated product sold into the spot market.
No cattle were tendered for delivery against the Aug contract Wednesday.
The CME Feeder Cattle index for the seven days ended Tuesday was $139.89 per cwt, down $0.12 from the previous day. This compares with Wednesday’s Aug contract settlement of $134.47, up $6.75.