In order to fathom how a trade war can impact currency, it’s important to have a clear understanding of what exactly a trade war is. Possibly the best way to define a trade war is to say that it is a side-effect that occurs when two nations try to undermine each other. They do so by implementing duties and tariffs on specific imports. A perfect example of this event in action is the international trade war that occurred during the Great Depression. During that period, economies deteriorated due to rising debt and the crumbling of domestic currencies.
In the midst of it all, the parties participating in a trade war aim to devalue their domestic currencies in order to reduce the pressure that inevitably falls on the export sector. This is a common occurrence and essentially helps preserve market share of all exports abroad.
If we were to examine how a trade war between the US and China would affect the USD, the obvious outcome would have to be the devaluation of that currency. Should there be a severance in the current trade relationship between the US and China, the outcome would be devastating. For starters, the industries would be negatively affected, and global currencies would need to be reevaluated.
The outcome of a trade war
During any trade war, the outcome for either of the parties involved isn’t at all favorable. It’s inevitably a lose-lose situation, but there is always a side that has more to lose. In the long-run, the parties contemplating starting a trade war should assess what they have to lose over what they have to gain. Unfortunately, this is rarely the case.
As a matter of fact, just because a trade war is going on between two parties doesn’t mean that it wouldn’t have an effect on the rest of the world. There would surely be some kind of ripple effect.
A trade war between two giants like the US and China would have a powerful impact on economies around the globe. Moreover, many economies hold a debt in dollars, so as the dollar increases, so does their debt.
The outcome for USD during a trade war between the US and China
In regards to the USD, the outcome is nothing short of grave. Basically, the trade war between the US and China would have a significant impact on the US currency. Moreover, it would impact the currency in more ways than one.
Ultimately, the US would end up spending more money than they are able to make. Furthermore, the additional spending would go towards foreign goods. In order for the US to compensate for this large trade deficit in Chinese products, they would pay back China. They would do so by printing USD banknotes. However, the problem now is that the US would have to give up the seigniorage that they’ve been enjoying for the last seventy-five years.
Next, periodic volatility would infest the USD as a result of new tariffs, and Federal funds would be immensely increased as well.
Also, let’s not forget that the US would lose the rights for consumption of cheaper products from China.
The fact that the US would delay many of China’s technological developments would cause the Nation’s agriculture to suffer tariffs. The same goes for all aquatic products, as well as technology products.
Yet another important thing worth noting is that the USD’s loss doesn’t necessarily mean the RMB’s loss. Namely, China contributes 14% of world trade and is the number one importer/exporter in the world. This leaves space for the RMB to become the new USD.
Foreign Exchange Market (Forex)
The simplest definition of Forex is that it is a “place” where traders buy and sell currencies. It’s not a physical location.
Ultimately, what makes the Forex market the largest financial market around the globe is the need to exchange currencies. One of the most unique elements of the Forex is that there is no establishment for foreign exchange since currency trading is done electronically. That means that all transactions are completed by traders worldwide, via computer networks.
One of the more obvious benefits of Forex trading is that it offers amazing opportunities and early profits to traders worldwide. The market is open all day, five days a week. As a result, the price quotes basically change daily.
Trading is done worldwide in New York, London, Tokyo, Frankfurt, Zurich, Hong Kong, Paris, Singapore, and Sydney.
All in all, it’s difficult to predict the exact outcome of any trade war. In the end, both parties may decide that they have more to lose than to gain.
It’s obvious that the US and China both wish to protect their economic prowess, so the situation can go either way.