Trade War and Tariff Negotiations and Chinese State Implications

Why Liberalizing the Yuan Poses a Threat to the Communist Regime

China refuses to enter tariff negotiations with the Trump administration due to fears that demands—particularly regarding currency manipulation—could threaten its one-party rule and economic stability. While the U.S. under Trump aggressively targets China for currency manipulation and trade imbalances, China views such demands as risks to its tightly controlled financial system and regime stability. The Chinese Communist Party prioritizes national security and economic control, making it unlikely to concede on issues like full yuan convertibility or free capital flows. Historical context and recent statements from Chinese officials underscore China’s cautious stance amid escalating trade tensions.

Key Points:

• Trump administration targets China for alleged currency manipulation and non-tariff barriers, using tariffs as leverage.
• China fears liberalizing yuan convertibility or capital flows could destabilize its economy and communist regime.
• China views Trump’s demands as potential threats to its one-party rule and economic security.
• Historical promises of yuan liberalization remain unfulfilled due to concerns over losing economic control.
• Chinese officials warn against concessions, comparing U.S. pressure tactics to appeasement policies before WWII.
• Trade war escalation reflects deep mistrust and conflicting priorities between the U.S. and China.

The impasse between the United States and China highlights a fundamental clash not only over trade policies but also over economic governance models. The U.S. approach, emphasizing market liberalization, transparency, and adherence to international norms, contrasts sharply with China’s preference for state-led capitalism and tight political control.

China’s leadership is acutely aware that yielding to demands for greater currency flexibility could lead to capital flight and financial instability, threatening decades of economic growth and social stability. Moreover, the ruling Communist Party sees maintaining control over the economy as essential to preserving its political legitimacy. From Beijing’s perspective, concessions could embolden domestic opposition and weaken the party’s grip on power.

On the other hand, the Trump administration views China’s practices—including alleged intellectual property theft, forced technology transfers, and state subsidies—as unfair trade advantages that harm American workers and industries. Washington’s tariffs are intended to pressure China to reform these practices and open markets more fully to U.S. goods and services.

As the standoff continues, experts warn of broader risks including disruptions to global supply chains, increased costs for consumers, and erosion of the rules-based international trading system. Both sides face domestic pressures: Trump seeks to deliver on campaign promises to protect American jobs, while Chinese leaders aim to maintain growth and social order amid rising nationalism.

What does this mean for China’s Abition to Dethrone the US Dollar?

China’s ambition to internationalize the yuan and reduce reliance on the US dollar has faced significant challenges. While initially pursuing a global yuan through initiatives like the Belt Road Initiative (BRI), capital controls and speculative attacks forced the People’s Bank of China (PBOC) to tighten restrictions and abandon a strict currency peg in favor of a controlled floating exchange rate. The fear of financial instability prevents China from fully opening capital markets, limiting the yuan’s potential as a global reserve currency. Instead, China focuses on promoting yuan trade settlements and managing risks related to US sanctions.

Key Points

• Initial Yuan Internationalization: China launched the BRI in 2013 to boost yuan use globally and reduce reliance on US dollars.
• Capital Controls and Speculative Attacks: In 2015-2016, capital outflows and speculative attacks on the yuan led PBOC to tighten capital controls and shift to a “dirty floating” exchange rate system.
• Financial Stability vs. De-Dollarization: China’s strict capital controls prevent full free capital flow, limiting yuan’s global reserve currency status to avoid financial crises.
• Current Strategy: China promotes yuan for trade settlements (bilateral/local currencies) but stops short of full de-dollarization due to economic risks.
• US Sanctions Risk Management: De-dollarization is viewed primarily as a hedge against US sanctions rather than a complete abandonment of the dollar.

The yuan’s future as a global currency depends on China’s ability to balance monetary policy autonomy, financial stability, and gradual capital market liberalization.

Future Prospects and Challenges

Looking ahead, China’s path toward yuan internationalization will likely remain gradual and cautious. Several factors will influence this trajectory:

Gradual Capital Market Liberalization: To enhance the yuan’s attractiveness, China may incrementally ease capital controls, improve market transparency, and encourage foreign participation in its financial markets. However, this process must be carefully managed to avoid capital flight or destabilizing speculation.

Financial Infrastructure Development: Expanding the global acceptance of the yuan requires robust financial infrastructure, including offshore yuan clearing centers, swap agreements with central banks, and development of yuan-denominated financial products.

Geopolitical Considerations: The geopolitical landscape, particularly tensions with the US and other Western countries, will shape China’s de-dollarization efforts. While the yuan offers an alternative for countries wary of US sanctions or dollar dominance, it is unlikely to replace the dollar entirely in the near term.

Domestic Economic Stability: Maintaining economic growth and avoiding financial crises remain paramount for Beijing. Any move toward full currency liberalization must safeguard domestic financial stability to sustain confidence in the yuan.

Technological Innovations: The digital yuan (e-CNY) represents a strategic tool for China to boost yuan usage domestically and internationally. Its success could enhance cross-border payment efficiency and provide an alternative to traditional dollar-based systems.

Conclusion

China’s ambition to promote the yuan as a global currency is a complex balancing act between fostering international use and maintaining tight control over its financial system. While progress has been made in expanding yuan trade settlements and establishing offshore yuan hubs, full de-dollarization remains a distant goal constrained by economic realities and geopolitical factors. The yuan’s future global role will likely be as a complementary currency in a multipolar international monetary system rather than as a direct replacement for the US dollar.