Over a week ago on Monday, China responded to tariff threats from Donald Trump by allowing its currency – the yuan – to drop to an “11-year low,” according to the Washington Post.
The move precipitated a sudden sell-off in the stock market, a sharp rise in the price of gold, and new worry that a trade war isn’t just arriving but is now here in full force. By the afternoon, the Dow Jones Industrial Average had dropped almost 1,000 points.
One point lingers: why was the devaluation of the yuan so important? The answer is simple: inexpensive Chinese exports. China, as a major manufacturer, makes its own exports far more attractive to international buyers when its currency is cheaper. A stronger relative dollar, for example, makes it easier for American companies to buy Chinese products when the yuan is low.
But that’s not the only reason the U.S. may already be deeper into a trade war with China than it cares to admit.
China’s Role as a Primary Customer of American Soybeans
The trade war is in full effect. To find evidence of that, look no further than the Chinese attitude toward American soybeans. As reported by U.S. Money Reserve, one strike – such as a President Trump announcement of new tariffs on Chinese goods – is often met with a counterstrike from China.
In a recent case, China ordered many of its companies to stop purchasing so many American soybeans. The move has pushed higher prices of soybeans in other countries, such as Brazil, where the trade war has pushed soybean prices up to $15.67 as of last week.
These trade issues exist because China is “halting all deals for U.S. farm products,” according to Reuters. This is an example of a trade war “counterstrike” that could have disastrous consequences for U.S. farmers.
Even if the trade war lightens, the damage is already done. Forbes writes that “China would have to triple U.S. soy purchases to make up for last year.” This is unlikely to occur.
A Full-Blown Currency War: The Yuan vs. the American Dollar
Although currency manipulation is not allowed under the rules of the International Monetary Fund – in effect since 1945 – China’s recent actions have warranted a U.S. response of calling the Asian nation a “currency manipulator.”
The People’s Bank of China – the central bank of the nation – typically keeps the Chinese yuan below a seven-to-one ratio to the dollar. Since 2016, China has often propped up the market value of the yuan, despite economic pressures for a lower market value on the currency.
Then, just last week, China allowed the yuan to devalue.
China’s valuation of the yuan is a powerful weapon in these trade wars. If further tariffs are announced, incentivizing China to launch further economic attacks, it could potentially mean that buyers flock to safe havens like gold.
Last week, as international finance fled from stocks, the price of gold leaped forward. Gold may be a comfortable place for buyers who want further protection from trade wars run amok.