Is an appreciating Yuan a solution to the ongoing trade war?

Aakanksha Shrawan 20th June 2018

After efforts to put “the trade war on hold”, the Trump administration has gone ahead with full force and escalated a trade war with China by imposing tariffs on USD 50 billion of Chinese goods. This has provoked an immediate tit-for-tat reaction from China which has, similarly, targeted imports from US such as beef, tobacco, cars etc. These tariffs are meant to penalise Chinese trade practices that has resulted in a trade surplus of USD 275.81 billion which is a record high.China has refused to allow its currency to appreciate in the recent times.The Chinese Yuan and Dollar Exchange rate has fluctuated within a narrow band of 6.05 to 6.40 during 2014 to 2018. Chinese government has moved slowly as it fears losing export competitiveness that an appreciated currency could entail.

However, there have been arguments that support the view that an appreciation of yuan would be in China’s best interest. Currently, China has the world’s largest foreign exchange reserves. As on May 24, 2018, China had USD 3.2 trillion in reserves. This is accompanied by rising consumer inflation. In February 2018, consumer inflation in China accelerated at its fastest pace since November 2013 on a yearly basis. High inflation in China has been succeeded by significant social unrest.

Also, the government is stronglyagainst an increase in unemployment rates that might increase if the exchange rates appreciate as imports will become cheaper shifting demand from domestic to foreign goods, in turn, affecting jobs in China.

The policy package that moves the economy to balance will include a) steps to increase China’s absorption i.e. its total demand for goods and services from anywhere in the world andb) a currency appreciation.Whilegoing for a stand-alone currency appreciation will surely switch expenditure towards imports (as a currency appreciation makes them cheaper), thus, lowering inflationary pressures but will...

Note: Views expressed in this blog are those of the author.