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Over the weekend, an interesting new development popped up regarding the looming US-China trade war. Apparently, last Saturday, the US Treasury decided to delay its semi-annual currency report which was slated to officially label China as a “currency manipulator.”

Before the housing bubble burst of 2007, it was a widely-known fact that Western countries, most notably the US, were the world’s biggest importers. Countries in the East, like China, provided them with all the goods they needed. By keeping the yuan’s value artificially low versus the dollar, China ensures that its goods stay cheap and competitive in the global trade market.

Say whuut? Like I mentioned in one of my old posts, the US thinks that China’s currency policy is causing a global trade imbalance. But if the US government is so determined to force China to adopt a more market-oriented exchange rate then why would they delay something as important as that?

Many are speculating that the US Treasury decided to delay the publication of their currency report for diplomatic reasons. After all, President Barack Obama probably doesn’t want to have an ugly spat with Chinese President Hu Jintao who will be visiting Washington this April. In fact, the two leaders could have an opportunity to sit down, share a burger, play skip rope, and discuss their currency problems during the upcoming G20 and US-China summits.

On top of that, word on the street is that the US is seeking China’s support in imposing tougher penalties against Iran’s nuclear program. Even though many lawmakers are still demanding that the US government take more aggressive actions addressing the global trade imbalance, I guess we won’t be seeing much finger-pointing nor hearing a lot of name-calling from the Treasury next week…

Many US senators are displeased with the administration’s decision to leave this trade imbalance issue unresolved. Some are even complaining that the US government is compromising the health of their economy in order to stay in good terms with China. Hah, so much for wanting to implement trade sanctions and branding China as a currency manipulator!

But let’s say that tensions do start to rise between the US and China. What would happen then?

Growing tension between the two may lead to even more concerns about the stability of the dollar. Recall that China has a boat load of US dollar reserves in its back pocket. If Chinese leaders get fed up with US officials telling them what they should and should not do, China may just choose to diversify away from the “world’s reserve currency.”

In my humble opinion though, this is not something either the Chinese or Americans want. They know that the fate of the global economy’s recovery largely hinges on their shoulders. After all, they are two of the largest economies in the world! If the leaders of the two nations come to fists (figuratively speaking of course!), then this could trigger widespread fears in the market, which could just erase all the progress that has been made since the start of the recession.

Hopefully, by the end of President Hu Jintao’s visit, a compromise can be made that both China and US will benefit from.