Macroscope | How the US-China trade talks ‘love fest’ may hit a snag over currency complexities

“There was a lot of friction between the United States and China, and now it’s a love fest,” said US President Donald Trump on Friday, announcing, alongside China’s Vice-Premier Liu He, “a very substantial phase-one deal” on trade, albeit one not yet set down on paper.

In reality though, such are the complexities involved in resolving this dispute, it is more likely that last Friday saw the end of the beginning of the US-China war, not the beginning of the end. The issue of currencies is a case in point.

Trump has consistently argued that China weakens the renminbi to gain a competitive advantage over the US even though the evidence in recent years indicates that when Beijing has acted to influence the renminbi’s value, it was to slow the depreciation.

It is therefore ironic that when the trajectory of the US-China trade war led the currency market to weaken the yuan below 7 to the dollar, the US Treasury chose to classify China as a “currency manipulator” – even though the renminbi’s fall in value surely owed far more to Washington’s recourse to trade tariffs than to anything Beijing did.

That designation of China as a “currency manipulator” may soon be rescinded. “We’ll be making a decision on that and evaluating it,” US Treasury Secretary Steven Mnuchin said on Friday, when asked about the issue. “Although I would comment that, assuming we close the agreement and we have the assurances, that will be a big step in the right direction for our evaluation,” he added.