US / China Trade War on the Cards

Thursday, 30 September 2010

If there was any chance that China could get away with its deceptive currency pegging strategy – the USA has just shot it down. In the last 24 hours, USA / China trade relations have soured slightly, as an announcement from the FTC in America has indicated that the country will be looking closely at trade between the two nations.

Since the second quarter of 2010, the value of the US Dollar versus the Chinese Yuan has fallen a whopping 9%. Of course, this is taking in to consideration the artificial currency market that China continues to operate.

In other words, the cost of importing goods in to America from China has increased, despite the fact that production in China has also increased. All in all, this means less money in the pockets of the US Treasury (in the form of taxes) and more money going directly to China.

Many market observers might ask – what is wrong with that? Well, on the face of it – not a lot. After all, the market should correct itself by lowering the level of purchases from China, right? Wrong. Imports from China are now so important to the USA that even a 9% rise in the overall cost has not deterred any trade. In fact, since the second quarter, imports have continued to rise from the country.

Therefore, because of this reliance, importing companies have taken measures in to their own hands. They have been lobbying the government to introduce trade sanctions against the likes of China if this type of anti-competitive behaviour continues.

Interestingly – Congress has obliged. Recently, in combination with the announcement from the Fed, new laws have been passed giving the department of foreign affairs new powers to intervene themselves where countries are intentionally holding down the value of their currencies. To be honest – we can only really think of one currency pair where this is happening, and of course it is the USD / Chinese Yuan.

Hence – this law seems to be targeted specifically to China if the practice of fake currency levelling continues. Even the passing of the law itself is a strong signal that the US is coming to the end of its tether and that the currency controls need to be relaxed sometime soon to avoid further retribution from the US.