With trade tensions with the US only set to increase, we expect the People’s Bank of China to allow the yuan to depreciate to 7.00 by the end of this year
Trade war looks set to be long and increasingly complicated
On 18th September, China announced fresh tariffs on a list of $60 billion worth of US goods. The tariff rates are set between 5 to 10%, which is lower than the 5 to 25% that was proposed previously, following a US decision to initially limit tariffs to 10% on its list of $200 billion worth of goods. However, these lower tariffs are only set to last until the end of 2018, and if the US increases the rate to 25% in 2019, as it has suggested, we expect China to follow suit – as it initially suggested back at the start of August.
This so far includes the reinstatement of a 2013 WTO dispute and lowering import taxes on various goods – a move designed to weaken the competitiveness of US companies in China. This decision will benefit other countries’ exports to China, while US imports suffer from the additional tariffs and this is a situation is similar to that of US automobiles, which face higher tariffs in China than imported cars from other economies.
But the trade war doesn’t end with tariffs. Geopolitical tensions in the South China Sea escalate at a time where China will not return to the negotiation table until after the US mid-term elections. The new trilateral trade bloc of US, Mexico and Canada (USMCA), will include a clause that allows any member to veto trade agreements between China and other members. With negotiations between China and the US delayed, the trade war is set to be a long and increasingly complicated process, which undoubtedly will continue into 2019.