Minding Ag's Business

Trade Dispute With China Would Have Currency Implications

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor

The China trade story is in a constant state of flux. One day there's a deal, the next there isn't. The latest salvo, as of this writing, is China says it will buy $70 billion of farm, manufacturing and energy products if the Trump administration abandons its tariff threats. The Wall Street Journal reports that much of it is still unsettled, and it's unclear if the administration will consider it. https://city.wsj.com/…

The impacts to agriculture directly would be enormous, and many experts have focused on quantifying what that impact could be. In some ways, it's become the "it" question for ag journalists: What's the impact of a trade war? Earlier this week, I spoke with CME Group Senior Economist Erik Norland about the impact rising interest rates would have on currency markets and, ultimately, the price of American agricultural goods on a global market. Then I asked him about trade. He made a clear distinction between the impact of rising rates but said there's always potential for trade disputes to exacerbate ongoing problems with currency markets. (To catch up on those issues, please read "Interest Rates Raise Currency Concerns" here: https://www.dtnpf.com/…)

"China exports a lot more to the U.S. than we export to them in general outside of agricultural goods. If we did something that was really harmful to the Chinese economy, the logical response of the Chinese government would be to devalue their currency," he said. So if we put a 25% tariff on Chinese goods, they could effectively neutralize it by devaluing their currency by 25%.

"I'm not saying that's what they would do, but it's a possibility," Norland said. "What I can tell you is that if China were to devalue its currency, it would bring a lot of other currencies down with it. It would bring down all of the currencies I discuss in this paper -- the Argentine peso, the Brazilian real, the Russian ruble, etc. They would all fall in response to any weakness in the renminbi." (Here's a link to his recent paper titled "Should U.S. Farmers Fret About Falling Ag Currencies" https://www.cmegroup.com/…)

When currencies devalue against the dollar, it lowers input prices for our competitors and makes their goods cheaper to produce, which in turn encourages higher investment and increasing production down the road. It also makes U.S. goods more expensive on the global marketplace.

"China is really the enormous consumer of these goods, so we see a pretty strong correlation between growth in China today and the prices of wheat, corn and soy going out one or two years in the future," Norland said.

China manages its currency to a floating peg on the U.S. dollar, and the approach often leaves China open to accusations of manipulation. As Norland said, it's a short step from managed to manipulated.

"You could argue that China was keeping its currency at an artificially low level for much of the 2000s, probably up to 2014 or so, but subsequently, the way China has managed its currency is to keep it artificially high. And so the real risk is if they stop managing, or manipulating, the currency, it will suddenly take a very sharp drop compared to the U.S. dollar. So anybody in the United States who wants them to stop managing, or stop manipulating, their currency better be very careful what it is they're wishing for."

China doesn't want its currency to lose value because it'd create a whole host of problems. "They worry if they make their currency convertible that a lot of people in China who would like to allocate capital elsewhere will start spending money abroad. There could be a huge amount of capital flight out of China, which could cause huge amounts of problems for their real estate market and their banking systems."

If the U.S. implements the $50 billion in tariffs and China retaliates, it will affect more than just exports. It will send shockwaves through global currency markets, handing our rivals yet another competitive advantage.

Katie Dehlinger can be reached at Katie.dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN

(AG)

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