US-China trade war: amid allegations that yuan is undervalued, why are tiny twist ties so important?
- Beijing and Washington quarrel over China’s currency again, and the fallout could affect US$450 billion worth of Chinese imports to the United States each year
- If the case involving twist ties becomes a precedent, it could materialise the controversial idea of using the yuan exchange rate to determine trade penalties
Beijing appears to be alarmed by a US probe into whether the yuan is being undervalued to give Chinese exporters an unfair advantage, which could spell big trouble for China’s US$450 billion worth of annual exports to the United States.
And that big trouble could stem, in part, from a very small item: twist ties – thin bendable wires coated in paper or plastic that are widely used for tying up bags, cables and food packaging.
But these tiny twist ties have become anything but trivial in the US-China trade war. In fact, China’s Ministry of Commerce has publicly warned the US to stop using claims of China’s alleged yuan undervaluation to justify the imposition of anti-dumping and countervailing duties on the imports of twist ties from China.
If the case, initiated by the US Department of Commerce this month, becomes a precedent, it could materialise the highly controversial idea of using the yuan exchange rate in determining possible trade penalties – and in theory, more Chinese shipments to the US could be affected.
This could give the US a new tool in restricting Chinese exports to the US, while potentially making the yuan a focus of the trade dispute between the world’s two biggest economies.
The quarrel over the yuan, however, flared up again after the Department of Commerce initiated an investigation in mid-July to determine whether twist ties were being dumped in the US at artificially low prices, and if Chinese producers were receiving unfair subsidies in producing them.
Subsidy programmes being investigated include tax programmes, government provision of public goods for less-than-fair market value, grants, government-provided loans, and China’s allegedly undervalued currency.
“China strongly opposes this,” China’s Ministry of Commerce said in a statement on its website on Thursday. “In general, the yuan’s exchange rate is at a reasonable equilibrium level and has not been undervalued.”
I’m really worried now because the US is signalling that the issues have expanded into the realms of ideology and a clash of civilisations
The investigation into the value of the yuan against the US dollar comes after a complaint was filed on June 26 by US company Bedford Industries and is based on a new rule published in coordination with the US Treasury in February for addressing such claims.
The Chinese government says this is the first such investigation by the US commerce department, but the International Trade Administration said it is the “second petition alleging currency undervaluation that commerce has received since February 2020”. There has not been any formal announcement of a second investigation, though.
China’s commerce ministry said that the issue of a currency’s value was beyond the authority of a country in conducting countervailing investigations under World Trade Organisation rules. Moreover, it charged that Bedford had omitted necessary details in its complaint regarding the specific benefits that Chinese twist-tie makers received in the form of financial help and grants.
The value of Chinese twist-tie imports was US$4.15 million in 2019, according to Minnesota-based Bedford. China’s alleged dumping margin of the product was estimated at 72.96 per cent below the normal price, according to the US commerce department. Bedford’s petition does not publicly disclose the volume or value of the US market for twist ties.
The US investigation into the yuan’s exchange rate comes as US-China relations have deteriorated to their worst level in decades, with the two sides clashing on a range of issues, including the coronavirus pandemic, trade and technology, China’s territorial claims in the South China Sea and its clampdown on Hong Kong.
US President Donald Trump said on Thursday that the trade deal “means less to me now than it did when I made it”.
Nobody in the market actually believes China is intentionally weakening the yuan
“I’m really worried now because the US is signalling that the issues have expanded into the realms of ideology and a clash of civilisations, beyond economic reasoning and being rational,” Xie said. “I don’t know how long this [phase one] trade deal can stay intact. It’s a balancing act.”
As part of the phase one trade deal signed in January, the US Treasury removed China’s designation as a currency manipulator that had been imposed last year. The Treasury has long been the lead agency responsible for making policy decisions on international monetary and financial issues.
At the moment, China does not meet the US Treasury’s criteria for being considered a currency manipulator, since it has only a small account surplus as a share of its GDP and has not intervened directly in the currency markets for years. In addition, the International Monetary Fund (IMF) regards the yuan as fairly valued.
However, the Treasury labelled China a currency manipulator in August last year even though it did not meet all its criteria at the time.
In February, the US commerce department said it would generally rely on the Treasury’s expertise in determining undervaluation, and asserted that it was accustomed to making difficult assumptions to determine duties.
But currency “manipulation” and “undervaluation” are not the same thing. Thus, the US commerce department’s exercise could differ from the Treasury’s, and theoretically it could still impose duties on Chinese imports based on the exchange rate, according to analysts.
Those analysts are unconvinced that the US commerce department could impose accurate countervailing duties on imports of a specific product based on an estimate of a country’s exchange rate undervaluation. But they agreed that the application of the new rule on Chinese twist ties could pave the way for further investigations into a broader range of Chinese products.
The two processes could come to different conclusions since they resulted from different statutes, said Li Liuyang, a currency analyst at China Merchants Bank, adding that there is no standard way to determine equilibrium exchange rates and thus measure under- or overvaluation.
The US International Trade Commission is expected to make its preliminary determination by August 10 on whether there is a reasonable indication that imports of Chinese twist ties are harming the US industry. If so, the commerce department would continue its investigation and make its preliminary determination of countervailing duties in September and anti-dumping duties in December.
If the US went ahead in imposing countervailing duties on Chinese twist ties, based in whole or in part on the exchange rate, that could raise questions over the validity of their trade deal, and thereby exert downward pressure on the yuan, which would be counterproductive to the US’ original intention, said Stephen Innes, chief global markets strategist at investment firm AxiCorp.
The IMF’s yuan index, which is based on a basket of the organisation’s special drawing rights currencies, fell last month to its weakest level since the yuan was included in the basket in 2016, before consolidating this month. The decline in the yuan’s index, which started at the onset of the trade war in 2018, suggested that its weakening was against other major currencies and not just the US dollar.
China’s central bank uses countercyclical measures to curb depreciation pressure on the yuan, to foster a benign environment for purchases of yuan-denominated assets as the nation opens up its capital markets to foreign investors, Innes said.
“Nobody in the market actually believes China is intentionally weakening the yuan,” Innes said. “They don’t want to do it, because they want to roll out the welcome mat for foreign investors with a stronger yuan.”
