A woman walks by a money exchange shop decorated with different countries currency banknotes at Central, a business district in Hong Kong, Tuesday, Aug. 6, 2019. China's yuan fell further Tuesday against the U.S. dollar, fueling fears about…
A woman walks by a money exchange shop decorated with different countries currency banknotes at Central, a business district in Hong Kong, Tuesday, Aug. 6, 2019.

The United States this week declared China a currency manipulator after Beijing stopped purchasing U.S. agricultural products and allowed its yuan to weaken. VOA's Arash Arabasadi talked to Bill Adams, Senior Economist at The PNC Financial Services Group, about the new twist in the trade war and the impact of further tariffs in the ongoing dispute. This interview was edited for clarity and length. 

VOA:  What is the practical impact of a country weakening its currency?

Bill Adams: When a country weakens its currency, that means that it's more expensive for people in that country to buy foreign goods. They spend more on products available locally. And it also means that businesses in that country can have more of an advantage in exporting to foreign markets.

It sounds like devaluing your currency would be bad for the people in the country.

Devaluing the currency — this is a classic there's-no-free-lunch-in-economics sort of an issue. Devaluing the currency helps businesses in the country to increase foreign sales and be more profitable. But it also means that prices rise for consumers, and it tends to crimp consumer spending. 

So, why is the United States labeling China a currency manipulator? Is this mostly symbolic?

The U.S. label of China as a currency manipulator is in reaction to the Chinese government's decision to let China's currency depreciate against the dollar in recent days. In the past, designating a country as a currency manipulator would be a first step toward imposing broad tariffs on all of that country's exports to the United States. But since the United States has already imposed tariffs on much of China's exports to the U.S. and is threatening to impose them on all Chinese goods exports to the U.S., the effect is more symbolic and more of a demonstration of how relations between the U.S. and China have deteriorated in recent months.

What effect will asking the International Monetary Fund to intervene have?

I think involving the IMF in the U.S.-China trade dispute means that this is going to be a slow-burning issue. That's not something that gets resolved overnight. So, there's not going to be an immediate IMF decision about whether China is a currency manipulator and what China should do about it.

Let's say the IMF says, "Yes, China's definitely a currency manipulator." Then what? 

Then that could open the door to the U.S. taking additional moves to sanction Chinese imports. The United States is imposing non-tariff barriers on China's foreign trade and commerce. But it's open-ended about what specifically would be done. Would that be more tariffs? Would that be restrictions on Chinese companies’ ability to access U.S. technology? Or would there be something different from what the U.S. government has already used to date to try to change the trade balance and change Chinese companies’ behavior?

What's China saying about being labeled a currency manipulator?

China is saying that its currency is moving in reaction to market forces, and the U.S. dollar has appreciated this year against many foreign currencies — the euro against the pound sterling, the British currency. And so, China's saying that their currency's move is really just paralleling what most currencies have done against the dollar.

White House economic adviser Larry Kudlow said this week that the U.S. economy is very strong, but China's is not. 

The U.S. economy is in a good spot right now. Unemployment is close to the lowest in almost 50 years. The U.S. economy is growing solidly in the first half of this year. But the U.S. economy is also slowing. A part of that is the effect of a fading fiscal stimulus. The tax cuts of 2017 were a temporary boost to the economy, and part of that is a drag on the globally oriented parts of the U.S. economy, from tariffs and other trade policy uncertainty. So, the U.S. economy is slowing right now, and China — and for that matter the global economy — is also slowing. It's the second half of 2019 (that) is going to be a slow patch for the global economy.

What's happening right now in terms of the effect on our economy and on China's economy?

The immediate effect of China's decision to allow their currency to depreciate is spillover to financial markets in the United States. And that's because, you know, two channels. One is that China using this tool means that the trade conflict is escalating and the downside risks from a trade conflict to the U.S. economy are increasing. The other is that a weaker Chinese currency means that Chinese businesses and Chinese consumers have less buying power to buy foreign gasoline, foreign inputs to China's investment engine, their housing investment industry. And so, that puts downward pressure on the growth potential of the suppliers to those industries all around the world.

What other countries are going to feel this? 

The depreciation of the Chinese currency also spills over to affect countries with close trading relationships with China. So, the same day that you saw the Chinese currency depreciate against the U.S. dollar, we also saw large depreciation of Korea's currency. Korea is a close trading partner with China. And we saw a large depreciation of Brazil's currency. Brazil is a major exporter to China of agricultural products and also of inputs to their industrial economy. So, there are spillovers. I know Korea and Brazil are not huge U.S. trading partners or huge parts of the global economy, but those spillovers to many other smaller economies add up to a meaningful effect on the global outlook.

China said it's going to stop buying U.S. agricultural products. What does that do to farmers and taxpayers here? 

It's a tough year for agriculture in the United States. I think the effect of prolonged Chinese tariffs on U.S. agricultural exports, and I think beyond the tariffs, the signal that the Chinese government is giving the domestic buyers is that they should look elsewhere. It's taking a situation that was already difficult because of really bad weather in the U.S .Midwest and making it worse. For the U.S. economy as a whole, I think we will see some impact of tariffs on prices at the checkout at stores in the United States. Some of that actually might be mitigated because the dollar has appreciated against both the Chinese currency and many other foreign currencies. So, the effect might not be that large in the near term. But I think probably we will see that before the end of this year if this latest round of tariffs is in fact put into place

What will we see by the end of the year?

Probably we’ll see higher checkout prices by the end of this year as retailers in the United States pass on the cost of tariffs to consumers if this latest round of tariffs is put into place. 

What else should we know about the trade war?

The week's events have been a tangible escalation of the U.S.-China trade conflict, but they haven't really been a surprise. Both the Chinese and U.S. governments had set themselves up in recent months for further stalemate or even escalation of this conflict. Both governments seem to be waiting for the other to make concessions. So, this is more of a realization of an event that had seemed like it was going to happen, rather than something that totally came as a surprise to outside observers.

Kudlow also mentioned that a Chinese delegation will be coming to the U.S. next month. What can we expect from that?

In the near term, I'm not expecting a big breakthrough on the trade negotiation. China sees the U.S. heading into a presidential election cycle. And they think that the U.S. is coming under increased pressure to resolve the trade conflict because of that. And the U.S. knows that China's exports to the U.S. are a more important contributor to Chinese GDP and Chinese employment than the other way around. And so, I think that's why we are in this situation right now of escalation and stalemate, as both countries' governments wait for the other to make concessions.

Who's going to blink first.

Yep.

WATCH: US-China trade war

Volatility, Uncertainty as US-China Trade War Escalates video player.
Embed