The first attack, of course, came from Donald Trump. At the beginning of August, the 45th US President threatened to increase import duties on Chinese products that have not been subject to new tariffs. For products worth US$ 300 billion, the increase will reach 10 percent.
"Our representatives had just returned from China. We reached an agreement with China three months ago. Unfortunately, they decided to renegotiate,” wrote Trump on his Twitter account on Thursday (8/1).
Trump was disappointed as Beijing had cancelled its commitment to purchase agricultural products from his country. China even plans to stop selling Fentanyl to the US. This upset Trump. He then raised the import duties for Chinese products, which will take effect starting September 1, 2019.
This was not the first time he raised the import duties for Chinese products. He also did the same thing on May 5, rising the tariffs for products worth US$ 200 billion to 25 percent from previously 10 percent. The reason was also the same: the deadlock in trade negotiations.
Since taking over the White House throne in 2017, Trump does not mess with his “America First” policy. Countries that he considers detrimental to the US will receive a blow from him. So far, it has been mostly directed towards China as the US trade deficit was the highest with that country. In 2018, its value reached US$ 419 billion. (See Databoks chart below)
However, China did not afraid of the attacks. It even fought back by increasing the import duties for US products in early June 2019 and lowering the value of its currency yuan.
Meanwhile, the attack earlier this week was unexpected. Weakening the yuan value to seven yuan per USD, the lowest level in 11 years, knocked down the financial market and global commodities. “China has reduced the value of its currency to the lowest level in history. It’s called currency manipulation," Trump said yesterday.
The trade war this past year has turned into a currency war. Based on its history, devaluation had caused Great Depression in the 1930s. At that time, developed countries, including the US, switched to metal from previously gold as the benchmark for their currencies and resulted in an economic crisis.
Chinese currency (123RF.com/Nat Bowornphatnon)
Yuan Weakened, Rupiah Depressed
Turbulence came directly to financial market. The rupiah value dropped more than two percent since the trade negotiations took place last week until today. Other regional currencies were also experiencing the same thing. From the following Databoks chart, we see the weakening of some Asian currencies against the US dollar. Only the Japanese yen strengthened in yesterday’s trade.
Bank Permata Economist Josua Pardede said the yuan devaluation increased the investment risk so that market participants would look for the safest assets to invest their capital. Therefore, strong market sentiment is risk aversion.
Based on historical data, the weakening of the Chinese yuan exchange rate will also drag down the value of other currencies, especially the currencies of developing countries. “China’s attempt to weaken its own currency is seen by investors as a trade war retaliation,” Joshua told Antara.
Exactly four years ago, the Chinese government had devalued its yuan by three percent. At that time, the country’s exports fell because they were less competitive compared to other countries’ products, such as Japan and Germany. Yuan movement over the past 11 years can be seen in the Databoks chart below.