In response to the announcement of higher US import tariffs on Chinese goods, the Chinese have devalued their currency to the lowest level in eleven years. Chinese government companies are also no longer allowed to import American agricultural products. The fear among investors for a further escalation is growing.

With two countermeasures, China is telling US President Donald Trump not to get involved. For the first time since the outbreak of the financial crisis in 2008, the renminbi can now fall below the symbolic limit of 7 renminbi per US dollar.

A strategic decision by China’s central bank, because with a weaker currency – which is partly controlled by the government – Chinese products become cheaper abroad. A counter measure that is against Trump’s sore leg. The US president has been blaming Beijing for some time for manipulating its currency to give a boost to exports.

But a weaker currency is not the only way Beijing can put Trump in place. It also announced the suspension of imports of American agricultural products. This is another embarrassing point for Trump, because in June the Chinese had promised to import more American agricultural products. Trump sees agriculture as an important weapon in his election struggle.

The fact that China failed to deliver on the promise of higher imports of agricultural products was one of the reasons Trump announced a new round of import duties last Thursday. From September, a 10 percent tax will be levied on 300 billion dollars worth of Chinese goods, including laptops, smartphones, children’s clothing and toys.

With Trumps announcement and the counterpart of Chinese president Xi Jinping, the trade war has entered a new phase. In June the two at the G20 summit in Japan closed a “ceasefire”. The US president then promised that he would not “temporarily” increase import tariffs for China, as talks between the two countries would resume.

The fact that the tide has now turned makes investors nervous, as can be seen on the stock markets worldwide. Investors drop Asian equities and flee to safe havens such as gold, the Japanese yen and US bonds. Even today, European markets are turning red, with shares falling by more than 3 percent on Friday, the worst performance of the year.

The market does not seem very confident about a successful outcome. The German bank Commerzbank expects that the decision of China’s central bank to weaken the Chinese currency will also devalue other Asian currencies. “A tsunami is imminent,” a bank economist told The Financial Times. “It is one of the worst possible scenarios,” responded Michael Every, head of Asian equities at Rabobank in Hong Kong.

The trade war started more than a year ago and affects both countries financially. The International Monetary Fund called the charges that the US and China introduced back and forth “worrying” and “a threat to global investment and growth.” According to the IMF, it would mean a loss of 445 billion dollars (almost 400 billion euros) for the world economy.

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