China can thank Trump

Tensions are rising in the trade war between the United States (US) and China. It is almost inevitable that the conflict will have an unexpected winner.

the menacing trade war between the US and China casts a shadow over the financial world. China announced on Wednesday April 4 that it will introduce a 25% import duty on more than 100 different product groups, ranging from aircraft to soybeans.

The tariffs are a response to the trade measures that US President Donald Trump implemented 1 day earlier. The Chinese counter-attack did not come as a surprise, but the scope of the package of measures is much larger than expected. The major US stock indices immediately fell by 1% to 2% in shock.

Trade war with surprise winner
Trump recently tweeted that trade wars are good and easy to win. In reality, however, they mainly know losers. The country affected by the sanctions is seeing a decline in exports. This will put a brake on economic growth.

In the country that implements the sanctions, consumers and businesses will have to pay higher prices for the affected goods and services. The negative effects only increase with each new round of countermeasures. If the trade war yields a winner, at least that's not the party Trump has in mind.

Bat in the henhouse
Trump is in the habit of throwing the bat in the henhouse in order to gauge how the various parties are reacting to his plans. If that reaction was too intense, he simply adjusted his course. Because of this, the soup was not eaten as hot when served. The most likely scenario is that this is happening now, so that the trade war ends with a fizzle. That would be a signal that China's political power has increased somewhat.

On the other hand, the country is also expected to pull out of the box if the trade war escalates further. In that case, China has an additional means of tightening the thumbscrews, thanks to its massive position of nearly $12.000 billion in US Treasuries.

China shows muscle
As China gains political or economic prestige, the dollar is under pressure from the uncertainty surrounding the trade war. That is also in favor of China. The renminbi is pegged to the US currency. Thanks to a cheaper currency, the international competitiveness of Chinese companies is increasing.

For the dollar, the fall in price is nothing new. The currency has been under pressure for almost 1,5 years, as a result of Trump's unpredictable political course. Recent developments suggest that this will not change for the foreseeable future.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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