A devaluation of China's currency during the ongoing trade war with the US may lead to more prosperity for Germany and the rest of the world, except the United States. But not much, an ifo report suggests.
A study by the German ifo Institute noted that a 10% devaluation of the Chinese currency, the yuan, would mean Germany gaining €413 million ($458 million) in real income. If the devaluation were to be 20%, it would go up to as much as €499 million annually, according to calculations based on the ifo trade model. The yuan has lost roughly 13% of its value against the dollar since spring 2018.
Martin Braml, a researcher at ifo, told DW the effect was calculated as follows: A currency devaluation causes exports to rise and imports to shrink. Chinese products become cheaper whereas German products become more expensive for Chinese consumers.
"We have estimations how large the effect of a devaluation is on the trade balance. Thus, for our simulations, we have assumed the Chinese trade balance to increase. In the short run, China might benefit because the currency devaluation keeps production high," he says.
The Chinese devalued their currency to remain their competitive position in the USA. But, unlike tariffs between the US and China, the exchange rate impacts all trade partners the same way: Germany, France, USA, and so on. "So this is a very costly attempt to keep market shares in the US as response to US tariffs," Braml added
"A devaluation of the yuan would have a limited impact on Germany," he goes on.
A 10% devaluation of the yuan would add €1.94 billion to the EU economy (excluding Germany); a 20% devaluation would push that up to €2.82 billion. The rest of the world (excluding the US) would gain €5.68 billion and €6.51 billion, respectively.
But a weaker yuan would also benefit the US. "US losses due to the trade war with China would be lessened by a devaluation of the yuan," Marina Steininger, co-author of the study, said. "If the yuan devalued by 10%, the US economy would lose just €397 million; if it devalued by 20%, the US could actually turn its loss of income into a gain of €476 million."
However, it's a welfare loss for the Chinese economy because it transfers goods away from domestic consumers to foreign consumers. For the same amount of goods imported, China has to produce and export more than before the devaluation.
"The outcome for China would be negative. Given the trade war and a 10% devaluation, the country would lose €29.27 billion; a 20% devaluation would drive that up to €33.79 billion," Braml added.
Weaponizing the exchange rate
In August, China's currency weakened to its lowest point in over a decade, leading the US to label Beijing a currency manipulator. The People's Bank of China's move was in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Trump administration that came into effect on September 1.
Beijing has previously sought to stop the currency falling below the symbolic level. The yuan is not freely traded and the government limits its movement against the dollar. The PBOC is not independent and faces claims of interference when such large moves take place..
While it appears a win for consumers around the world, a weaker yuan also makes imports into China more expensive, driving up inflation and adding to strains in its slowing economy, as well as pushing currency holders to invest in other assets.