Fuel Added to the Blazing US-China Conflict by 'Cheap Chinese Goods'... Will Trade and Currency Wars Resurface?

G2, Disputes Over Bundle Cable Issues
US: "Artificially Low Prices Set, Exported to the US"
Yuan Undervaluation Also Seen as Cause of Unfair Trade, Under Investigation

[Asia Economy Reporters Sunmi Park, Juseok Naju] The cheap Chinese-made bundling wire exported to the United States is becoming a spark for the resurgence of the US-China trade conflict, which was barely resolved by the Phase 1 trade agreement signed in January this year. Controversy is flaring up again over the undervalued yuan causing trade disadvantages to the US, raising the possibility of a renewed trade war amid ongoing US-China tensions over issues such as the spread of COVID-19, the Hong Kong Security Law, the South China Sea, and embassy closures.

According to the Hong Kong South China Morning Post (SCMP) on the 28th, the US and China are clashing over the issue of bundling wire, widely used for cables or food packaging. The US Department of Commerce began an anti-dumping investigation in mid-month into Chinese bundling wire exported to the US at artificially low prices. They are examining whether Chinese companies producing bundling wire are unfairly supported by the government to the extent that they can endure low export prices. Items under focused investigation include tax support, government public goods or loan support, and yuan undervaluation.

China reacted strongly when the US anti-dumping investigation touched on the yuan undervaluation issue. The Chinese Ministry of Commerce issued a statement last week saying, "The yuan is not undervalued and is at a reasonable level," and warned, "The US must stop dragging yuan undervaluation into justifying anti-dumping and countervailing duties on Chinese products." The Ministry of Commerce expressed outrage that the US is exceeding its authority by involving currency value issues in anti-dumping and countervailing duty investigations.

The problem is that this incident could be a trigger for the resurgence of the US-China trade war rather than a one-off event.

SCMP analyzed, "If the US concludes that yuan undervaluation played a significant role in the low pricing of Chinese bundling wire and imposes punitive anti-dumping and countervailing duties, it will set a precedent, making it highly likely that similar measures will be applied to other Chinese products."

The yuan exchange rate remains around 7 yuan per dollar based on the official rate announced by the People's Bank of China. The US, which has long claimed that China deliberately keeps the yuan undervalued to gain export competitiveness, lifted the designation of China as a currency manipulator following the Phase 1 trade agreement in January, temporarily halting the currency issue.

However, even if controversy arises again over the undervalued yuan causing trade disadvantages to the US, the recent decline in the dollar's value may act as a 'firefighter' in the currency battle between the two countries by curbing further yuan depreciation.

The dollar's value has fallen to its lowest level in two years. The dollar index, which measures the dollar's value against six major currencies, recorded 93.652 on the 27th (local time), the lowest since June 2018. The dollar's value has dropped 3.9% this month alone based on the dollar index. This is the first time since September 2010, during the global financial crisis, that the dollar's value has fallen so sharply on a monthly basis.

The biggest reason for the dollar's weakness is concerns that the US economic recovery will be delayed following the spread of COVID-19. The US measures to mitigate the economic shock are also causing the dollar's value to decline. The US, which has chronic fiscal deficits, is pouring out various stimulus packages under the pretext of responding to COVID-19. This method of financing relying on government bond issuance is pulling down the dollar's value. Jens Nordvig, CEO of research firm Exante, said, "The dollar has been strong for the past six years, but now the adjustment has begun."