Trade war between China and the US is affecting Economies

Published on: 08/1/18 11:31 AM

Category: Uncategorised

Recently, President Trump announced tariffs on Chinese goods that enter the country. Although the trade wars between China and the US involves many aspects, microeconomics is an excellent approach to determine which country of the two highly depends on the trade to grow economically.

It is important to note that China exports approximately a third of their goods to the US. On the other hand, the US exports only 14% of goods to China. Besides, according to Bloomberg, China’s exports is about 20% of the GDP while in the US, it is roughly 12%. In this case, the Chinese economy is more susceptible to the trade war than the US.

China is the largest market in Asia and the second largest in the world. The trade wars are not only affecting the market, but also the currency. In the recent past, the Yuan has weakened considerably. The pressure to counteract the economic tribulations is also contributing to the weakening of the Yuan. Irrespective of the risks involved, the trade wars will significantly affect the Chinese economy and therefore reduce demand for goods.

The Weakening of the Yuan and The Dropping of Copper Prices

Unlike other industrial metals, Copper is closely related with the global economy. For instance, high copper prices correlate with a positive economic outlook and vice versa. The drop in copper prices in the recent past has considerably affected the global economy.

Starting June this year, there has been a close relation between copper and the Yuan. Since China is one of the biggest manufacturers in the world, the demand for copper is very high. Therefore, the weakening of the Yuan is also affecting copper prices. This relationship is predicted to continue growing actively in the coming days.

The Effects of the Trade Wars on the USD/CNH Exchange Rate

As both China and the US engage in the tariff wars, the recent currency exchange rate is an indication of the seriousness of the matter. Recently, the US dollar has been climbing intensely while the Yuan has been failing at an alarming rate. However, some experts indicate that the predicament of the Yuan is not an indication of the traditional fundamentals. Intervention by the Chinese authorities might change the situation. In fact, in the past few days, the Yuan has been showing some resistance. On the other hand, according to Guppy indicator, although the trade war is at its peak, short-term traders are bullish on the USD/CNH. The Guppy indicator involves various moving averages to evaluate the market condition.

The Bottom Line

On a broader perspective, the trade war is affecting economies of both countries. However, when considering the essential economic elements and financial balance, China is likely to lose more. The weakening of the Yuan and a drop in copper prices is a perfect example.