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China devaluation unlikely to shift trade war in its favor

China's market-shaking decision to allow its currency to weaken past 7 to the dollar for the first time in more than a decade probably will not give it the upper hand in its trade conflict with the U.S.

While the 1.5% move on Aug. 5 was eye-catching, it merely caps an 11% decline since April 2018, which has not been enough to counter the barrage of tariffs imposed by the Trump administration.

As measured by value of goods, the U.S. is currently winning the trade war. Looking strictly at products impacted by the first $250 billion tranche of tariffs imposed on imports from China, U.S. imports fell by $7.70 billion in June from the previous year, while Chinese imports of U.S. products fell by just $1.33 billion, according to Panjiva, a trade-related division of S&P Global Inc.

As well as letting the yuan weaken, China said it would halt purchases of U.S. farm products in response to President Donald Trump's Aug. 1 announcement that he would impose 10% tariffs on $300 billion of Chinese goods starting Sept. 1.

China, at $9.3 billion in purchases, was the fourth-largest agricultural market for the U.S. in 2018. Trump tweeted Aug. 6 that "China will not be able to hurt" U.S. farmers, while also hinting that he may be prepared to offer another bailout package for U.S. farmers in 2020 if they continue to be targeted.

While the currency yuan alone is unlikely to have a noticeable adverse impact on bilateral trade volumes between the U.S. and China, a combination of the cut in agricultural purchases and the potential imposition of tariffs on the $300 billion tranche will lead to at least a 10% decline in U.S.-China bilateral trade year over year for the second half of 2019, said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics in Washington.

However, Beijing's decision to allow its currency to fall past the symbolic 7 level does signal it is ready to step up its response to U.S. tariffs, a view bolstered by rhetoric from the Global Times, which is seen as a mouthpiece for the Chinese government.

"The trade war has been protracted to now," tweeted Hu Xijin, Global Times editor-in-chief. "The U.S. has put the biggest card on table, China is relieved. Now fight, China no longer expects goodwill from the U.S."

The Trump administration responded to the weaker yuan on Aug. 6 by labeling Beijing a currency manipulator, which, while largely symbolic, makes it more difficult for the two sides to reconcile their differences and reach a deal to end the trade conflict.

"In itself, [the devaluation] has few practical implications," Simon MacAdam, a global economist for Capital Economics, said in a note.

"But it is emblematic of a deteriorating relationship that looks set to get worse."