The simmering tension between the world’s two largest economies has threatened to boil over in recent months and China’s official announcement is sure to bring some relief. China has now declared that it will not use its currency as a weapon in the ongoing trade war – and this announcement comes just as global markets have started to show signs of recovery.
1. China: A Leader in the Global Trade War
China, the world’s largest economy, plays a major role in the ongoing global trade war. It has been consistently forward-looking in its approach to global trade, taking proactive steps to strategically position itself at the forefront of global competition.
This attitude has been exemplified in China’s open and updated stance on free trade agreements, its increasingly open inward investment framework, and its forward-thinking approach to trade negotiations, with intellectual property and commerce being key points of contention. In addition, China has actively been raising its profile in world trade forums, showing commitment to its role of a responsible global leader.
- Free Trade Agreements: China is the world’s largest participant in free trade agreements and is one of the first countries to ratify the Trans-Pacific Partnership.
- Open Investment Structure: China has also opened up its economy to foreign investment, with investment screens being significantly lowered.
- World Trade Forums: China has been heavily involved in forums such as the World Trade Organization, advocating for a rules-based global trading system.
2. How China’s Currency Plays into the Trade War
The US-China Trade War has many complex elements, but one of the biggest is the exchange rate of the Chinese currency, the Renminbi. The Renminbi has seen a rapid devaluation since 2018, making Chinese manufactured goods less expensive to buy in other countries, including the United States. This has raised the ire of American companies who see the devaluation as an artificial means of gaining an advantage in the world market.
In response, the US has imposed tariffs on Chinese goods and tightened regulations on investments. The Chinese government also faces a delicate balancing act between limiting the currency’s devaluation and avoiding further US tariffs. China has responded to the US tariffs by increasing the tariffs on their imports, which add further to the complex web of the Trade War.
- Renminbi’s devaluation – Renminbi devaluation is still a potential issue for the Trade War.
- US response – US has currently imposed tariffs on Chinese goods & tightened regulations on investments.
- Chinese response – China has responded to US tariffs by increasing their own tariffs on imports.
3. Chinese Government’s Pledge to Not Weaponize Currency
In an effort to increase the global respect for Chinese currency, the Chinese Government has taken the pledge to never weaponize it. This measure was taken as a means of protecting China and its economy from potential harm resulting from the utilization of its currency for political, military or economic aggressions.
This pledge has been praised by China’s peers and international economists, as it showcases the government’s commitment to foreign country’s and global financial stability. Outlined below are the reasons why this pledge serves as a positive move:
- Promotes international trust: Governments will gain more trust in China, as their assurance of not using the yuan for weaponizing purposes makes it a more predictable tool for the international realm.
- Increases stability: Ensuring the yuan is not used for forceful measures will reduce the risk of negative consequences, increasing stability.
- Raises respect: Global respect for the yuan will rise, as countries understand that China takes its responsibility as an economic player seriously.
4. China Takes a Strong Stand on Trade War Tactics
The trade war between the United States and China has begun to take a harder line. In recent weeks, negotiations between the two countries have been tense, and China is now indicating it will not be making concessions for the US.
China has released a clear statement that it will stand firm against interference from the United States in their economic affairs and will pursue its own agenda. This statement has been backed up with tangible actions, such as foreign investment bans and other retaliatory measures. China’s determination to stay true to itself shows that it is ready to take the necessary steps to protect its national interests.
- China has imposed restrictions on US firms doing business in the country. This includes blocking American tech firms such as Facebook and Google from entering the Chinese markets.
- China is maintaining an independent currency system. The country has resisted US attempts to impose a strong dollar system on it.
- Beijing is focusing on increasing domestic demand to enhance its economy, as opposed to relying on foreign investments to grow its industries.
The dispute between China and the United States over trade, however, is far from over and currency may still play a role. As the world’s two largest economies continue to jockey for position, it is clear that China’s commitment to use its currency responsibly could be the difference between an ongoing clash and a peaceful resolution.