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U.S. Dollar: China−U.S. Trade War and the FX Market

Mon, Sep 14 2009, 16:59 GMT
by Richard Lee

Online Forex Trading  |  View company's profile

It’s not difficult to have missed the new developments in the U.S.-China trade relationship over the weekend. Little has been said since animosity sprouted over prices of steel and the days of union workers barking at politicians’ doorstep. However, now it seems that another product has come to light as the Obama administration looks to put tires in the spotlight. The move could spark another confrontation with the rising Asian power and rekindle some harsh feelings, and subsequent rhetoric, that was witnessed back in 2005-2006. More importantly, what does another potential trade war mean for the FX markets, especially the U.S. Dollar?

Quick Look Back

The trouble all began with a piece of legislation that was passed back in 2000, which gives the administration the ability to impose import tariffs or other protectionist measures should certain imported goods bring harm to a U.S. based industry. In 2005, the same ability was called into power as the Schumer-Graham bill attempted to protect U.S. consumers by passing a 27.5 percent tariff on all Chinese imported goods. The latter sparked a light debate with Beijing and Washington which resulted in numerous meetings on both sides and calls for reform in the way China handles its currency. Ultimately, the bill never passed and both Senators agreed to dismiss the potential plan noting that the bill had served its purpose.

On Friday, President Obama stirred up anger in Beijing following an announcement that a tariff will be levied on Chinese imported tires. The new duty will be as high as 35 percent for a year. This is in stark contrast to what some industry officials pulled for– a tariff of 55 percent in the first year and 45 percent in the second. According to union leaders and industry professionals, the import tariffs are needed as Chinese tire market share as increased three fold in just short of five years. Beijing has responded with animosity, ensuring an investigation of “certain imported automotive products and certain imported chicken meat products originating from the United States”. Subsequently, if there are any signs of price manipulation, Chinese policymakers will look to implement their own tariff justice.

The Standstill

Although both sides have issued fighting words, there will likely be little done. It remains obvious that leaders continue to be pressured by industry unions and representatives, with Chinese officials being led by a sense of strong public outcry. President Obama is looking to keep to campaign promises with the U.S. worker being the focal point, hoping to dampen a trade imbalance that pits an almost 4.5 to 1 ratio. For every one U.S. dollar that is spent in China, $4.50 is spent on Chinese made imports in the U.S. Nonetheless, the picture hasn’t changed much since the 2006 debacle other than the fact that China has amassed $2 trillion in U.S. assets.

What has remained the same is the fact that both economies rely on each other. China continues to require American consumption in order to fuel its growth needs while U.S. based companies look to capitalize on China’s lower cost of manufacturing. Not to mention the continued purchase of U.S. securities. Both key elements will keep China and the U.S. cautious in elevating the situation to anything higher than harsh banter. As a result, traders will look towards other upcoming events in gauging the severity of the situation. In particular, President Obama’s visit to China in November and the G20 meeting at the end of this month will be fodder for scrutiny.

FX Market Implications

Not likely to affect other major currencies, the implications of this weekend’s news will likely point some to the USDJPY currency pair. Due to the proxy trade of the currency and the underlying Chinese yuan, speculation may help the Japanese yen appreciate further against the greenback. Should politicians continue to jawbone over the topic of protectionist measures, helping to support speculation of a trade war, bids on Chinese yuan are surely to be translated into demand for the Japanese yen. The same occurred in 2005 following the revaluation of the underlying yuan. However, the idea will likely lose steam as fast as it has gained should the topic fall easily to the wayside as it did in 2006.

Published on  Mon, Sep 14 2009, 17:00 GMT

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