Question

Read the following online excerpts,

“The 2018 global trade war began with a single United States safeguard tariff on washing machines and solar cell panels in January. It subsequently picked up steam as the year progressed and developed into an all-out trade tariff war. Its cause centers on President Trump's ostensible belief that trade deficits with countries around the world are hurting the U.S. economy, in particular the manufacturing industry. By imposing tariffs, Trump aims to cut the deficits and therefore, he claims, boost the domestic U.S. manufacturing sector. However, leading economists believe that the tariffs will either harm the US economy or have no effect whatsoever. The Trump administration has targeted China, the 27-member European Union, and neighbors Mexico and Canada.” (OANDA, 2018)

“Dramatically escalating the trade war between the United States and China, President Donald Trump on Friday said he would raise tariffs on $550 billion in Chinese goods in response to new barriers imposed by Beijing.” (Fritze, 2019)

1. China's currency (the Yuan) has slipped to its lowest level in a decade on Thursday, August 23, 2019. What is the impact of a weaker Yuan to the price of its exports and the price of its imports?

2. Research on the topic of currency movements. Would managers engage in international business prefer stable or unstable currency movements? Why or why not?

Answer 1

1. If the value of the yuan falls, Chinese exports will be cheaper relative to other countries (e.g. the US). A falling yuan will boost demand for Chinese goods , leading to China's higher growth.
A decrease in the Yuan, however, will make goods from other countries comparatively more costly and will lead to lower demand for goods from other countries.Devaluing the yuan would lead to more competitive or cheaper Chinese exports. This will, in essence, minimise the impact on Chinese imports of the additional tariffs levied by the US as part of the ongoing trade war.

2.There are a myriad of reasons why currency can become unstable. There is a lot that goes into deciding exchange rates, from politics and government policies to natural disasters and trade boycotts / embargoes. A business has no real power or control over them.This is the most apparent example that shows how a business can be seriously impacted by changes in exchange rates. Exporting goods abroad means that there would be two separate currencies for the cost of making goods and the price of selling them. What this means is that, for some serious gains or similarly, some catastrophic losses, the company is in.

A stable currency also controls inflation and deflation in an economy. Stable currency minimises uncertanity in international business.