💸 Can a Currency Be Devalued?

Digest Newsletter

 
OK, Tell Me More?
Over the last few months, the media has been littered with articles covering the trade war between China and the US. Recently, Donald Trump has been calling China out for manipulating its currency, the yuan (CNY). 

 
 
Hmm, Go On?
Trump has been tweeting about the injustices of global trade since he took office at the end of 2016. One of his major gripes has been with China and how the country’s cheaper imports are supposedly killing the American economy. This has led him to start implementing tariffs on certain imports from China.
 
What About China?
China is the world’s largest exporter with ~R32 trillion worth of exports recorded in 2016. Major exports include electronics like computers, cellphones and circuit boards. When the US implemented tariffs on Chinese imports, it made Chinese goods more expensive on US soil. This translates into fewer goods being exported from China and lowers economic growth. Trump argues that to avoid this, they’re manipulating their currency.

Let’s imagine you get $1 for CNY1. So, a widget costing CNY1 costs a US company $1. With a 10% tariff tacked on, that same widget now costs the US company CNY1.10, meaning the US company may end up buying less. To avoid this, the Chinese can devalue their currency so that now CNY1.10 gets you $1. The US importer now ends up back at square one paying $1 for the item. The tariffs would have limited to no effect.


Are The Chinese Doing This?

Their authorities have come out and said they are not using their currency as a weapon in this trade war and instead are letting market forces decide what the exchange rate is. Recent weakness in the yuan has Trump blowing his horn on manipulation, but this weakness may just be in response to the trade war and a slowing economy in China.

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