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Trump sanguine on lengthy trade war; China sees ‘chaos’

Reuters

Containers are seen at Yantian Port in Shenzhen, China, on July 4.

ReutersWASHINGTON/BEIJING/SHANGHAI (Reuters) — U.S. President Donald Trump dismissed fears of a protracted trade war with China on Tuesday despite a warning from Beijing that labeling it a currency manipulator would have severe consequences for the global financial order.

Trump, who announced last week he would slap a 10 percent tariff on a further $300 billion in Chinese imports starting on Sept. 1, tweeted that “massive amounts of money from China and other parts of the world” were pouring into the U.S. economy.

He also pledged to stand with American farmers in the face of Chinese retaliation. China has halted U.S. agricultural purchases and raised the possibility of additional tariffs on U.S. farm products.

U.S. farmers, a key political constituency for Trump, have been among the hardest hit in the trade war. Shipments of soybeans, the most valuable U.S. farm export, to top buyer China sank to a 16-year low in 2018.

While Trump played down the prospect that the trade dispute could be drawn out, St. Louis Federal Reserve Bank President James Bullard said the U.S. central bank may be stuck with a volatile global trade environment for years.

“I think of trade regime uncertainty as simply being high in the current environment,” Bullard said at a National Economists Club luncheon. “I do not expect this uncertainty to dissipate in the quarters and years ahead.”

The U.S. Treasury Department said on Monday it had determined for the first time since 1994 that Beijing was manipulating its currency.

It acted after China decided to let the yuan fall below the key seven-per-dollar level for the first time in more than a decade, rattling financial markets and dimming hopes for an end to a trade war that has dragged into a second year.

U.S. stocks strengthened on Tuesday afternoon, with the S&P ending up 1.3 percent a day after dropping 3 percent. The Nasdaq surged 1.4 percent.

The yuan strengthened on Tuesday as China’s central bank took steps to contain its slide.

London’s FTSE 100 closed sharply lower, bringing its losses to more than 5 percent since Trump announced the additional import tariffs on Chinese goods.

China’s central bank said on Tuesday that Washington’s currency move would “severely damage international financial order and cause chaos in financial markets,” while preventing a global economic recovery.

China “has not used and will not use the exchange rate as a tool to deal with trade disputes,” the People’s Bank of China (PBOC) said.

“China advised the United States to rein in its horse before the precipice, and be aware of its errors, and turn back from the wrong path,” it said.

The Trump administration wants to continue trade talks with China and is still planning to host a Chinese delegation for talks in September, Larry Kudlow, director of the White House National Economic Council, told CNBC on Tuesday.

Kudlow said movement toward an agreement could change the outlook for U.S. tariffs, adding, “It takes two to tango.”

He added that the U.S. economy was still in good shape and said he saw no signs of a global recession on the horizon despite growing concerns the U.S.-China standoff is slowing manufacturing activity around the world.

“The economic burden is falling vastly more on them [China] than us,” Kudlow said.

Kudlow said Washington was forced to make the currency designation given a 10 percent drop in China’s currency since April 2018, and said other members of the Group of Seven (G7) industrialized countries supported the action.

“At some point in time, if they are violating our laws, WTO (World Trade Organization) laws and, frankly, G20 laws of currency stability ... we have to take the action,” he said. “They brought it on themselves.”

Roger Altman, a former Treasury Department official and founder and CEO of Evercore investment firm, told CNBC he was skeptical that Trump would allow prolonged instability in financial markets since his reputation was staked so closely to economic growth and the success of the U.S. stock market.

However, he said, China showed no signs of reforming its approach to technology transfer, intellectual property theft and cyber attacks.

“Unless that changes, we’re headed for a form of Cold War with China,” Altman said.

He said a currency war would be even more destabilizing for markets than the trade war, one reason China had acted swiftly on Tuesday to shore up the yuan’s level.

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