Trade Deal Favors Depreciation

Trade deal between two leading economies Creates depreciation pressure with less worries.

Both the USA and China successfully concluded a trade deal, clearing the ambiguities amid tariff war. As part of the agreement the USA will impose 55% tariff on Chinese goods while the China will levy 10% tariff on American goods. In addition, China will resume export of rare earth minerals vital for electronics industry and continue sending students to the USA.

Though the deal appears to give a sigh of relief, global trade still remains volatile amid US declared policy on easing the pressure on US dollar demand or weakening the USD.

The deal has implications for Bangladesh as well. Now we exactly know how much the China has to depreciate its currency to stay competitive in the US market. A 55% depreciation of Yuan will make the exchange rate 11.11 Yuan/USD. If the Chinese govt really allows this depreciation, then Chinese products in the US market will not witness increase in prices. So inflation in the USA will not be worse as disseminated by some quarter.

Meanwhile, Bangladesh is still in negotiations with the USA. It is facing a 37% tariff, which is likely to get lowered after successful negotiations. Current budget has proposed to remove VAT on LNG,soybeans and animal feed. It appears that LNG and soybeans may be on the list of Bangladeshi negotiating team. Bangladesh spends billions of dollars importing these two important items. In any eventuality, Bangladesh has to depreciate its currency between Tk 134.20/USD(for 10% depreciation) and Tk 167.52/USD (for 37% depreciation).

Luckily, Bangladesh govt removed tariffs from major agricultural inputs ,leading to lower the food inflation. If fuel prices stay stable, then Bangladesh has a good chance to depreciate its currency further without incurring serious inflationary pressure. The World Bank projection shows growth cut for the global economy, meaning less demand for goods in 2026. This will put downward pressure on major commodities.

The trade deal also put forward a new issue. The USA wants a weakened dollar in the years to come. The China with the resumption of trade will acquire USD and start buying treasury bonds , increasing the demand for USD. The US states passed laws that bar Chinese investment in agricultural land and purchasing property deemed near to sensitive area. Given the dwindling state of Chinese housing and capital market, a large part of the money will end up buying US treasury bonds , further complicating the US steps to weaken USD. It means there will be depreciation pressure on other currencies including Taka unless the USA comes up with a contingency plan.

The recent trade deal between the USA and China will bring pace to other bilateral trade negotiations. Hoping this will lead the trade talks between Bangladesh and the USA to see a successful end. Since there is no appreciation pressure on Taka for now, govt may consider to depreciate Taka further to make Bangladeshi goods more competitive.