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26 Mar 2010

International Economy

US-China Trade Friction: Unlikely to Become a Trade War (Business Brief No.2786)

The US pressure on Chinese authorities to appreciate the Yuan is due to the US political situation. The US House of Representatives mid-term elections are scheduled to take place in November, so US authorities have to urgently solve problems on unemployment and exports to improve their overall economy per avowed policies.
Thus, the US is trying to persuade China to allow the Yuan to appreciate more flexibly, and thus help relieve the US trade deficit. The US implies that they might announce increased tariffs on Chinese export products if China does not accede to the US request. On the other hand, China could apply similar measures to US products imported to China.
However, it is hoped that the US reaction may be symbolic rather than substantive in intent. As a result, this trade dispute is unlikely to affect many products, nor increase tariffs to any great degree. Thus, the impacts of such trade measures by both countries will likely not be severe. USA and China have shared common interests as they largely rely on each other's economies.
The Chinese authorities may gradually allow increases in the exchange rate value of the Yuan in 2H10 based on inflation and the global economy, which is now recovering, with some remaining risks. The Chinese inflation rate has surged in line with the Chinese and global economic recoveries, and drought will affect the volume of farm produce harvests, as well as raising product prices. Meanwhile, exports have not recovered that much because economic growth of China's trade partners remains largely fragile, wherein the public debts of some EU member states and high deficit ratios of fiscal balance to the GDPs of Greece and Portugal will decelerate the overall EU recovery.
Since China is still using fiscal measures to stimulate their economy in 2010, we forecast that the Chinese economy will likely do better than in 2009 when it reached 8.7 percent growth. Although that growth decelerated after the introduction of tightened monetary policy to help forestall inflation or a real estate bubble this year, it is expected that the Chinese economy will likely still grow at least 9 percent.

Thailand will be affected by this conflict somewhat, due to the fact that China is the world's largest producer and exporter, and Asian countries – including Thailand – are part of China's supply chain. Increased import tariffs that may be introduced by the US and Chinese authorities that may have indirect impacts on Thai exports because we supply raw materials to Chinese manufacturers for incorporation into finished product exports to the USA. Then, reduced exports to the USA would have a follow-on impact to Thai exports. However, the negative effect of that would likely be quite limited and not damage our overall exports to China.

International Economy