- The trade war, as well as the currency war and the protests in Hong Kong, are three elements that are closely related
- China is using Hong Kong as an intermediary to partially dodge US tariffs
- The devaluation of the yuan shows that China is willing to take the conflict to other economic areas beyond simple tariffs.
Too many issues have come together in these days in a triangle formed by China, Hong Kong and the United States. The tariff war has resulted in a derivative in the form of currency warfare, all this while in Hong Kong there are massive protests that claim not to fall into the spiral towards the autocracy they seek in Beijing. The first two are often read as an economic issue; the second, as a matter of civil liberties. However, all of them are related and have a common link: geopolitics. But let’s go in parts.
When Trump launched into the White House race almost four years ago, one of his fixations during the campaign was China. He took commercial advantage of the United States, did not respect intellectual property, manipulated the currency and other advantages that, beyond Trumpian histrionism, were true. That is why he set out to reverse all that if he reached the presidency. And he did. One of its objectives has been to renegotiate all possible trade agreements in favor of the United States , and China has not been an exception. As Beijing has resisted this solution, the president simply opted for something that a businessman like him is good at doing: squeezing his opponent. Thus launched throughout 2018 a battery of tariffs about almost any Chinese product that the United States imports, something that has only escalated since then, alternating Chinese replicas and US counter-replies.
In parallel to this commercial pulse, protests have arisen in Hong Kong over the controversial law of extradition to China, which ended up being withdrawn by the enormous social rejection it generated. However, beyond this issue of political rights, Hong Kong and its internal avatars are a fundamental piece in these dynamics between the United States and China. The political struggle is based on the fact that the pro-Chinese sectors want to assimilate the Hong Kong system, which today enjoys great autonomy and enough unthinkable freedoms in China, precisely that system that prevails in the Asian power. On the contrary, the most liberal part of society wants to remain in the situation of current autonomy or move towards independence to get as far away from China as possible. However, this situation favors Beijing in the long run, where it was stipulated that this autonomy would be maintained for 50 years – until 2047-. Therefore, that year China may simply assimilate the territory in its entirety.
In the context of the commercial war the importance of this territory is not less: Hong Kong receives special treatment in commercial terms from the United States thanks to a 1992 law, the Hong Kong Policy Act. This law is based on the autonomy of the territory and, in exchange for continuing to guarantee the good levels of political and economic freedom that exist there, the United States undertakes to treat Hong Kong as if it were a country other than China in the aspect commercial. And this situation also benefits the People’s Republic, and much. Hong Kong is the second destination of Chinese exports after the United States, and that is that Chinese companies use this enclave as an intermediary to sell their merchandise to other multinationals based in the autonomous territory, which in turn use it to penetrate mainland China . The big problem for Beijing of the trade war is that the United States taxes any import from China. But thanks to Hong Kong, Chinese products can dodge, at least partially,thanks to a system called first-sale rule .
So far the picture does not seem excessively harmful to China. However, since mid-June – shortly after the protests began in Hong Kong – Democrats and Republicans have promoted a new law in the US Congress – not yet approved – called The Hong Kong Human Rights and Democracy Actto demand that those persons who have committed human rights violations in autonomy be identified in order to sanction them, as well as to create a procedure by which, annually, the United States endorses maintaining the current 1992 agreement taking into account that the The level of autonomy in the Hong Kong territory has not been diminished. If not, Washington reserves the right to revoke that commercial prerogative and commercially equate mainland China and Hong Kong. In that case, China would lose one of its great cards to avoid US tariffs. However, if the United States carried out this movement, China would assume much less costs by accelerating the total assimilation of Hong Kong. Conversely,
In this sense, China, despite having the Hong Kong letter, is clearly at a disadvantage in its trade war with the United States due to the fact that its trade balance with the North American country is enormously asymmetric: the Asian power exports much more to the US than on the contrary , so it is much more exposed to tariffs than its rival. Thus, instead of continuing to climb on a pulse he has lost, he has chosen to take the battle to another terrain where he plays with something more advantage: the currencies.
For us to understand each other, the Chinese Central Bank has much more control over the exchange rate of the yuan – the Chinese currency – than the Federal Reserve has with the dollar. The first does not float freely – its exchange rate is not determined by the supply and demand of the foreign exchange market – while the second is. And that difference means that China can devalue its currency to gain some commercial competitiveness in a way in which the United States does not have such a tool. In addition, this devaluation poses a challenge to Trump of first level: the president had accused China of manipulating his currency to gain unfair commercial competitiveness–Because it is true–, but this move from China involves accepting Trump’s ordeal and going to harm a wound that, perhaps, in the White House they were not expecting that Beijing could dare to do.
The great hope of China to end this trade conflict is that Trump loses the presidential elections in November 2020. So far, all the rounds of negotiation that have happened between the two have been unsuccessful. It is a risky move, because the polls do not ensure a defeat of the current president and the panorama of Democratic candidates does not suggest that they will present a figure of overwhelming charisma and privileged vision. Therefore, in this period of time until the elections – and who knows if with an extension of four more years thanks to a new mandate of the New Yorker -, China seems to have only two options: either to capitulate to the United States or continue the escalation towards A limit that nobody knows where it is.