Pound Sterling in relation to the United States - China trade dispute

Pound Sterling in relation to the United States - China trade dispute

The United States and China are at it again this year. The Trump administration, since the time it took office, has been hinting at imposing tariffs on Chinese imports in order to force it to change its trade policies towards the United States of America, which it termed as unfair. China also on its part imposed tit-for-tat tariffs on American imported goods, adding fuel to the fire. The dispute though has been on since the time of the China joining the WTO but got a booster dose of animosity with the Trump administration assuming office.

Amongst the major accusations being leveled by the United States on China are, the theft of intellectual property and the forced transfer of American technological knowhow to Chinese regulators. China on its part has been able to promote itself as the worlds cheapest manufacturing base and has become the worlds largest consumer of basic raw materials, thereby producing basic and intermediate products and exporting the same to the rest of the world. Manufacturers in the United States of America and the rest of the world are a worried lot on account of these cheap imports and have been pressing their governments to take corrective measures to protect local industries. United States in particular has been accumulating an ever-increasing trade deficit with China on this account and has been desperate to fill the gap. It has resorted to increasing tariffs on Chinese imports in an attempt to bridge the same. This tariff war has not only damaged Sino-American trade to a great extent but has also been impacting the diplomatic relations between the two countries.

The impact of this trade war of the world economy has also been significant. The trade war has depressed business sentiments across the world as both of these countries are the largest consumers of basic commodities and the largest markets. A weakness in the demand, supply and a tweak in trade tariffs between these two countries disrupts the demand supply equilibrium of the world markets. This not only impacts commodity markets but also has a cascading effect on the world currency and equity markets. The IMF in its world economic forecast report published in 2019 has painted a not so encouraging picture of the world economy and has held China - United States trade war a major factor resulting in the same, in addition to the slowdown of the Chinese economy and the Brexit situation unfolding in UK and rest of Europe.

Towards the second half of 2019 however, there have been signs of subsiding of tensions between two of the largest economies as they have engaged in highest levels of talks with their respective heads of government in order to bring down the tensions between both these countries. By October 11 of 2019 the Trump administration announced reaching some kind of an understanding with its Chinese counterparts, with the American side will to drop certain tariffs imposed on Chinese goods in exchange for the Chinese side agreeing to buy increased amount of American farm goods along with allowing American financial firms greater access to the Chinese markets.

The importance of China has never been so pertinent to the Europeans especially to the United Kingdom as a trading block during this interregnum period of Brexit. There is greater urgency now on both sides of the English Channel as the two economic blocks of United Kingdom and Rest of European Union formalize their deal of parting ways to enter into competing trade agreements to find replacement for the loss of business activity ensuing out of Brexit. Ever since 2016 the entire region has been reeling under depressed economic conditions when the decision of withdrawal of United Kingdom from European Union was announced. The capital markets have also been suffering in the entire region, leading to a shrinkage of investment activities as economic activity across the region has been shrinking for some time now. Under such circumstance it is but natural for investors and companies to look at regions outside of Europe to generate value.

The world currency markets have also been greatly rattled by this trade dispute between the first and the second largest economies of the world. The weakest currencies, however, are the ones where there is slowdown in the local economies, most notably the United Kingdom and China. The United States Dollar however has been trading stronger against most of the major currencies.

The United Kingdom’s Pound Sterling has been one of the worst hit of all currencies amidst the current economic turmoil. The impending impact of Brexit with the result of a fall in exports has meant that the demand for the currency has come down significantly. Second, British companies had significantly increased their presence in China during the past few years both as manufacturers and sellers; a slowdown of the Chinese economy would also be hurting the prospects of these companies significantly. China is not only a significant market for British Exports, but a significant number of Chinese tourists and students arrive every year bringing in significant amount of foreign currency to the British government. In the event that business activity with China comes down, United kingdom’s total volume of foreign trade would reduce significantly.

China has made several high-profile investments in the British economy and in its companies and at this time is also a significant investor in the country. In addition to the exponentially increasing trading activity among these two countries the mutual flow of capital between the two countries has increased significantly over the recent years. HSBC Holdings Plc, ARM Holdings, Burberry Group Plc, Intertek Group Plc and Standard Chartered Plc are some of the most important of British companies belonging to FTSE 100 index having significant business in China which get more than a fifth of their earnings from their operations in China.  It is logical thus that a trade deal could go a long way to push up the fortunes of the British Companies given the above level of engagement between the two countries.

The British Pound Sterling thus at this time is more China oriented than the United states and will be favourably impacted if there is positive news flow from China. The United States of America though a traditional and a large trading partner of the United Kingdom is not of much consequence at the present juncture.

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