(picture from Wix's library)
Hi everyone!
I know, I know… I stopped writing a while back and I’m sorry if any of you were waiting for my next little piece! Well, although I am quite busy these days, I could not resist writing this article for you guys.
Lately, I heard Mr. Trump complain (again) that the Chinese Renminbi (or Yuan, pick the one you prefer) was being pushed down (made weaker) on purpose. He alleged that the Chinese government (through its central bank, as is usual in these cases) is again manipulating its currency to help its own exports.
This is something that China has actually done in the past. If you look at a graph of the value of the Chinese currency compared to the USD (U.S. Dollar) from July 2008 all the way to June 2010, the Yuan (again, compared to the USD) is impossibly stable… and weak. Since then though, China has let its currency ‘float’ and its value has increased substantially. Mr. Trump wanting to call China a currency manipulator when he took office in 2017 was ridiculously out of date.
SO, what about this time around? Is Mr. Trump wrong yet again?
Looking at real data from the real world, we can see that the Chinese currency has lost around 8.3% in value (compared to the USD) from the end of April 2018 up until now. It does look like a substantial lost that could indeed help Chinese exporters sell their products abroad more easily.
That decrease in the value of the Chinese currency might be seen as a happy ‘coincidence’ for the Chinese economy because it coincides with the infamous tariffs put on their products going to the USA.
For those that need a little reminder, import tariffs (from the perspective of the USA) are like a tax on foreign products (Chinese exports in this example). By imposing such tariffs, Mr. Trump is hoping to make Chinese products more expensive in the USA (because they have to pay an extra tax that others don’t need to pay), which can lead to people buying local products instead of Chinese ones… at least that’s the idea.
I’m not going to go in details on why or how Mr. Trump decided to impose import tariffs on Chinese products nor will I try to explain if it makes any sense. However, let’s just say that Mr. Trump thinks that China is cheating WTO rules, and he wants to make trade ‘fair’ again (besides making America… well that little part of the Americas… ‘great’ again). If you want to read an article showing the pros and cons of protectionism in general, you can find it here (https://www.professorpro.net/single-post/2016/10/23/Should-we-protect-ourselves-from-trade)
SO! Here’s Mr. Trump’s argument (assuming that he does indeed take time to try to justify his ideas): (1) USA puts tariffs on Chinese goods to make trade fair again; (2) the Chinese government devaluates its currency to cancel some (all in some cases) of the effects of those tariffs; (3) trade is unfair again and China should be called a currency manipulator and punished even more.
Here are the facts: (1) Mr. Trump has an aggressive stance towards China regarding their trade imbalance (it is truly a trade imbalance, which is not necessarily bad at all). Tariffs have been put on Chinese products entering the USA. (2) The Chinese currency has recently weakened, which helped Chinese exporters sell to the USA, even cancelling the tariffs recently put in place.
It seems that Mr. Trump might be right this time… except that he’s not.
Here’s the really funny part of that whole story: Mr. Trump’s continuous talk of punishing China and his use of tariffs on Chinese products have themselves created the devaluation in the Chinese currency!
The Chinese government did not have to do anything (although I must say they might have ‘helped’ the slide in their currency a bit) for their currency to drop the way it did. All this talk about isolating and punishing China, coupled with action such as tariffs, is enough to lead to ANY currency losing value… definitely so in the case of the Chinese Yuan.
This is yet another example of what Economists call ‘perverse incentives’, which means that a certain policy can lead to a change in people’s behaviour that results in the complete opposite of what the policy was trying to do.
In this case, Mr. Trump’s use of tariffs (with all this aggressive rhetoric) lead to investors and currency speculators to sell their Chinese Yuan and reduce their demand for it. That in turn lead to a weakening of that currency, which boosted Chinese exports and cancelled some, if not all, of the tariffs Mr. Trump used in the first place.
What comes around goes around, I guess… even in Economics!
In conclusion, Mr. Trump has only himself to blame for the depreciation of the Chinese currency. His claim that China is a currency manipulator is either completely outdated (as discussed at the beginning of this article) or based on ignorance of basic Economic principles.
That’s it for now! I hope you guys enjoyed this little presentation of yet another little twist that the economy keeps throwing at us.
Have a great time and don’t forget to have fun!!!!!!