August 2, 2018 / 5:16 AM / 15 days ago

Breakingviews - Falling yuan alone won’t save China from tariffs

HONG KONG (Reuters Breakingviews) - A falling yuan won’t be enough to save China from tariffs. The United States is ramping up duties once more on imports from the People’s Republic. The yuan’s depreciation against the dollar will cushion the blow, but complex Asian supply chains will ensure it still stings.

U.S. President Donald Trump listens to remarks by U.S. Trade Representative Robert Lighthizer before signing a memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington, U.S. March 22, 2018. REUTERS/Jonathan Ernst

U.S. Trade Representative Robert Lighthizer said on Wednesday that the administration is raising its proposed duties on $200 billion of Chinese goods to 25 percent, up from a previously floated 10 percent. The announcement comes just after Bloomberg reported that representatives of U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are in talks to restart negotiations.

As former IMF Chief Economist Olivier Blanchard noted, a ballpark 6 percent to 7 percent depreciation could mathematically offset the initially mooted 10 percent tariffs. The yuan has fallen more than 7 percent against the dollar since early May. A 25 percent duty, however, would require something more like 12 percent, which would put the yuan trading around 7.2 per dollar, compared to 6.8 now.

The reality is complex, however. According to the latest OECD figures, foreign value-added content amounted to about a third of China’s gross exports. Snaking Asian supply chains mean many intermediate products cross borders several times, muddying the relationship between exchange rates and exports. The Japanese yen depreciated 37 percent against the dollar between 2012 and 2013, for example, yet its goods exports to the United States actually declined in 2013.

The prospect of collateral damage from devaluation should also make officials jittery. The country’s offshore dollar debt, which analysts at Nomura estimate at around $775 billion outstanding, will become harder to pay back. A too-rapid slide in the yuan could spur capital to shift offshore, requiring officials to burn foreign reserves in order to stabilize expectations as they did in 2015. The perception abroad that Beijing is deploying its currency as a trade weapon could complicate negotiations, and deter foreign investment into Chinese equities and bonds. A cheaper yuan will certainly blunt the impact of fresh tariffs, but it’s no panacea.

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