Caught between a strong $USD and a weaker Yuan

The Chinese have a bigger problem than we do…

…and it’s good that someone in Washington finally figured it out.

Free trade is the goal, unrestrained and fair, but it’s very clear one of the world’s largest exporters has been taking advantage of their trading partners for quite some time now, taking liberties that hurt our economy and our citizens. The new tariffs will impact the US by causing an increase in inflation and long-term interest rates. Our exports to China are only 0.6% of GDP causing the increase in tariffs to reduce the outlook for GDP by 0.1%. But Chinese exports to the US are 4.0% of its GDP and the new tariffs are likely to cut their output by 0.8%. This is significant in a large economy that is already slowing.

Slow growth is a problem for Chinese leadership. Worth watching is the yuan now trading around 6.91 to the dollar. The Chinese economy depends on capital flows and a weaker yuan could cause outflows to increase dramatically as foreign investors look for stability and more opportunity in other world markets. A weaker yuan would help offset some of the effects of the tariffs, but it would also weaken the currencies of most exporting emerging market economies. Because commodities are priced in dollars, cost of goods sold would increase because of the strong dollar and a weaker domestic currency. Selling US treasuries is an option but not likely since there are few good options for the money to be reinvested.

The trade dispute looks likely to continue, but the Chinese have more to worry about than we do.

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