The Trade Wars.

So, is it the USA or China? Who do you think has an upper hand in the trade? Don't know yet? Read along. So how did it all start?

  • As we all know the USA is a major superpower and is the strongest economy of the world, USD the official currency of the US is the official currency of the world and China has been trying from very long to make the Yuan as strong or even take over the USD as the global currency. The USA is no fool as even they very seeing this and then the US President Donald J. Trump decided to start the attempt to show China that the USA is not backing down. So on July 6 2018, US imposed import tariffs of 11% on $34 billion worth of Chinese goods, on July 10, 2018, U.S. released an initial list of the additional $200 billion of Chinese goods that would be subject to a 10% tariff and further imports worth $16 billion subjected to a 25% tariff later in the year. In response to this China also imposed 25% tariffs on $16 B worth us US imports. This did not stop here as again in September 10% tariffs on $200 B Chinese goods and so did China with a 10% tariff on $60 B of US goods. And this just went on and on with even WTO not able to intervene much, until December 2019 to January 2020 where a trade deal was signed to ease these restrictions and make trade come back to normal. Amid COVID-19 recently the USA asked China for support on its trades as their economy has already opened up.

  • What is currency manipulation?- The US government accused China of currency Manipulation amid the Trade war. Since China is an export-oriented country it would try to keep the Yuan cheaper than a dollar so that the Chinese exports are cheaper in the USA. Amid these trade wars PBOC( People's Bank of China) kept on buying the excess USD from the exporters and paying them in Yuan making the supply of the USD less and increasing the demand for Yuan much more and since the PBOC keeps printing Yuan it depreciates yuan so that the exports are even cheaper and the effect of these tariffs can be minimized. Without these interventions, a self-correcting currency mechanism would appreciate the Yuan. But when IMF looked into the matter they ruled it as a result of market forces and said PBOC has no hand in this.

  • Why China buys US bonds ?- As we already discussed how China stockpiles USD in return for Yuan it accumulates its Forex Reserves with USD. As USD increases the safest investment for them will be stable and high return yielding US treasury bond. Thus buying US debt (As gov bonds are a way of raising money as loan fro Government), which will ensure that the US keeps buying Chinese goods thus the Chinese will get a bigger market. A lot of people recently were under the influence that China can dump these bonds when they want without affecting them. But this is not the case; if China decides to go ahead and sell these bonds it will increase the supply of USD in the economy as compared to Chinese Yuan; thus devaluating USD and increasing Yuan which make China's Exports costlier and hence it will lead to a crash of its export industry, unemployment, poverty, bankruptcy will follow and USD's exports will be much cheaper but it will cause inflation in The US economy and as a result, the demand for its goods in The USA itself will decrease over time while tax revenues will increase, but so will the costs of running a government, hence it will not be feasible. Even the interest rates will increase as is usually done to curb inflation so The FED will have to pay more to roll over the debt and thus once again costing The FED more hence it will hurt both China and The US.

  • Global Impact - If we are under the impression that trade war will only affect US and China we are wrong. Trade wars were helping them both by correcting trade balances but at the same time, it was hurting their economy as well. With tariffs on Chinese goods, a lot of product was not being bought thus laying of production units, laying off workers, slower economic growth and for the farmers, the producers in the US after China stopped buying US farm products. According to model simulations by the Bank of Finland, tariff increases currently in place will slow global GDP growth by around 0.7 of a percentage point and higher risk in markets has led to tightening of finance in emerging companies and higher volatility in stock markets. This means again equity investments will take a hit and Gold and other investments may be a way to go.

What is the prospected future?

China, as we saw, had a huge store of USD and treasury bonds. Thus a large amount of US debt is owned by china thus it has a huge market for its products. As we already saw a phase 1 trade deal and also in the light of coronavirus Us urged China to buy US goods and China even relaxed certain restriction on US goods thus improving trade relations and reducing market volatility. But Donald Trump's recent statements again can cause aggressive trade policies and this time USA can be hurt because China is the only major economy that is back to its full functionality and if it stops the trade right now US exports will be really affected and again causing harder time inflating the economy because of the simple reason of "no trade, no money". Also, USA needs China more than China needs USA reason being it has been seen china has become more and more self-sufficient with its imports dropping down to 20% in 2019 from 38 in 2007, whereas the USA relies on China for import of products. So we need to wait and watch how things turn out to be for either of these two nations

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