China wants to involve Ukraine and its FTA with the EU in the currency wars

Author : Oleg Ustenko

Source : 112 Ukraine

Ukraine might become a new "factory" of Europe with not quite a favorable business climate
11:15, 23 February 2017

Read the original text at Facebook of Oleg Ustenko.

During a telephone conversation between the Secretary of the Treasury is the head of the U.S. and the IMF head, American side has cleared the exact expectations from the IMF. The United States hopes that "the IMF will undertake an honest and in-depth analysis of the exchange rate policy among IMF member countries."

In my opinion, the expectations of the US Treasury is primarily that will start serious pressure on those countries whose local currencies are "undervalued." The logic is very clear. In case of trade with the United States, these countries have a serious competitive advantage. One of the examples is China. Undervaluation of yuan has been topical in the US a long time ago. Given that the United States is China’s a major consumer of the exports, in the event of such an "honest" and pressure analysis, China would occur in much worse situation. Severe correction in long-term forecasts of growth of the Chinese economy are possible, but this is highly undesirable for the Chinese leadership. Reducing export (ceteris paribus) will lead to the inhibition of growth. Do not forget that China is the second largest economy in the world, so we are talking about huge numbers.

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The products should find their consumer. The question is where to find this consumer? Who will be able to compensate this possible reduction of China’s foreign exchange earnings? Europe is one of the considered possibilities. But this is not that simple. If the yuan strengthens "under the stick of the IMF" and "assistance" the United States, it will strengthen the dollar and the euro as well. One possibility for China to compensate the loss is to make its exports cheaper in the EU. How? Not to pay import duties. Theoretically it is possible, if you open a free trade zone with the EU. In practice this is not possible (at least for the foreseeable future). Opening its production in the EU is another potential, but because of the sharp increase in costs it is unrealizable in practice.

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There is also an opportunity try to "break in" through the side. And the Chinese authorities has already begun testing this "side entrance." Last year's statement by China's ambassador to Ukraine concerning the desire to start negotiations on establishing a joint free trade area was a first attempt. And at this time, the interest of Chinese investors in Ukraine would sharply increase. Their logic is absolutely clear. Why should they pay import duties when crossing the customs border of the EU (about 10% on average), if they can take advantage of the FTA.

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FTA with Europe allows anyone (interested in the EU) to take advantage of it. I am not saying it is bad; it's just a "genre". Moreover, Ukraine has a number of advantages, including a cheap but skilled workforce. The average salary in Ukraine is about $ 200 per month, while Chinese salary in the amount of more than $ 700 can be a serious "motivator". So Chinese businessman might save 10% on import duties, and even on the low cost of labor Ukrainians. He would very actively begin to do it in the foreseeable future. Chinese investor is not even scared of the quality of business climate in the country. This is not a European and not American businessman. He has a different mentality - it will break "through the thorns to the stars."

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In such a scenario additional and significant impetus to the economic growth would be undoubtedly positive for Ukraine, which is so necessary for the "tormented" economy. But in the long term perspective, it means that Ukraine might become a new "factory" of Europe with  not very high-quality business climate.


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