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Dangerous escalation of the US-Chinese trade conflict

06.08.2019

Statement by Klaus-Jürgen Gern on recent developments in foreign exchange markets and the reaction by the US administration.

Dr. Klaus-Jürgen Gern, expert for global economic developments, Kiel Institute for the World Economy (IfW Kiel):

"The current depreciation of the yuan and the labeling of China as a 'currency manipulator' by the US government are a dangerous escalation of the US-Chinese trade conflict. These steps indicate that for now neither side is prepared to give in. On the contrary, tensions are likely to persist and possibly intensify. At the same time with allowing the renmimbi to depreciate against the dollar above the 7 RMB/$ threshold, the Chinese government has announced to have stopped the import of US agricultural products, which would hit US farmers hard if it were to last.

At least as far as the use of tariffs in the trade war is concerned, the USA is at the longer end of the stick. However, further tariff increases to weaken the Chinese economy would entail increasing costs for the US economy as well. The prices for goods from China for US consumers and companies would rise, as would the costs for companies that use Chinese imports as intermediate products or have outsourced final production to China. The Chinese government, too, risks placing a burden on the domestic economy if the stop of US agricultural imports cannot be fully offset by other imports from the world market, leading to supply bottlenecks and price increases for food and feed in China.

Uncertainty about the progress of the conflict is weighing on the global economic outlook and thus also on international stock markets. The already weakened German economy is also being dampened. The depressed mood in industry has begun to spread to other sectors of the economy and the economic slowdown is starting to have an impact on the labour market. Positive effects, particularly for consumers as a result of falling import prices for Chinese goods, are of subordinate nature".

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