Tariff Shocks and the Adjustment of the RMB's Status as a Currency Anchor: Evidence from the 2018-2020 China-U.S. Trade Friction
ZHANG Chong, CAO Pengju, LIU Yao
School of Global and Regional Studies/Faculty of Applied Economics, University of Chinese Academy of Social Sciences; National Academy of Economic Strategy, Chinese Academy of Social Sciences
Summary:
Faced with the escalating twin deficits in the current account and fiscal budget, the Trump administration imposed a 10% “minimum benchmark tariff” on more than 180 economies worldwide on April 2, 2025, and levied additional higher tariffs on 60 economies with substantial trade deficits with the United States. The “reciprocal tariff" policy runs counter to the current rules-based multilateral trading system and the rule of free trade, reducing the volume of U.S. international trade and damaging confidence in the U.S. dollar in the international monetary system. Nevertheless, the U.S. imposition of exorbitant tariffs on China may exacerbate the conditions of China's foreign trade and foreign investment, lead to a slowdown in China's economic growth and fluctuations in the financial market, and exert a negative impact on the internationalization of the Renminbi (RMB). Against this backdrop, what exactly is the impact of U.S. tariff hikes on the international status of the RMB? How can the Chinese government seize the opportunity presented by the Trump administration's tariff measures to further advance the internationalization of the RMB? From the perspective of a currency anchor, this paper conducts an in-depth analysis of the impact of U.S. tariff hikes on the international status of the RMB. Intuitively, a currency anchor refers to an institutional arrangement that pegs a country's currency exchange rate to a single foreign currency or a basket of currencies. Taking the period from January 2016 to December 2024 as the observation window, this paper dynamically estimates the RMB currency anchor level of 195 economies worldwide, with a sub-sample of 63 economies adopting intermediate exchange rate regimes as the key research object. It further explores the impact and transmission mechanisms of U.S. tariff hikes on China on the RMB's status as a currency anchor, and conducts an extended analysis of the implications of China-U.S. trade frictions during the second term of the Trump administration. The empirical findings are as follows: First, when the tariff rate is low, an increase in U.S. tariffs on China first elevates and then diminishes the currency anchor's status of RMB, indicating a significant inverted U-shaped relationship between the two variables. The regression results based on the full sample show that the inflection point of the tariff rate is approximately 13%. For economies with closer trade and investment links with China as well as Asian economies, the tariff inflection point is higher, indicating that they are less affected by U.S. tariff hikes. Second, the fundamental channel, trade diversion and outward investment channel, financial volatility channel, and financial openness channel are the main transmission mechanisms through which U.S. tariffs affect the RMB's currency anchor status. On the one hand, higher U.S. tariffs on China weaken China's economic fundamentals and amplify financial market fluctuations, thereby undermining the RMB's currency anchor status. On the other hand, such tariff measures drive trade diversion and outward investment from China, consolidate China's central position in the global industrial chain, raise the level of RMB denomination in trade transactions, and expand the openness of China's financial market and the stock of offshore RMB, thus boosting the RMB's currency anchor's status. Third, when the tariff rate reaches an extremely high level, the currency anchor's status of RMB does not suffer a significant decline. Through trade diversion and outward investment, China has consolidated its core position in the industrial chain and enhanced the network externalities of RMB, which in turn exerts a notable positive effect on its currency anchor's level. The above conclusions have important policy implications. First, in response to China-U.S. trade disputes, China should adhere to a stance of retaining both retaliatory measures and negotiation efforts. On the basis of taking reciprocal retaliatory actions, China should engage in trade negotiations with the United States, striving to reduce bilateral tariff rates to the levels prior to 2025, or even to those before 2018. Second, China should persist in promoting trade diversion and capital export to consolidate and elevate its core position in the Asian industrial chain. Seizing the development opportunities brought by the Regional Comprehensive Economic Partnership (RCEP), China should consolidate and strengthen its core role in the regional industrial chain, proactively expand RMB settlement and bilateral local currency settlement through cross-border financial cooperation, and thus raise the currency anchor's level of RMB.The potential contributions of this paper are threefold: First, it examines the impact of U.S. tariff hikes on the RMB's currency anchor's status, providing evidence for China's advancement of RMB internationalization amid China-U.S. trade frictions. Second, it delves into the internal mechanisms underlying the nonlinear impact of U.S. tariff hikes on the currency anchor's status of RMB, offering a path reference for RMB internationalization. Third, the paper not only analyzes the scenario of the first round of China-U.S. trade frictions (2018-2020) but also discusses the latest developments of the second round (since 2025), thereby putting forward feasible policy recommendations for China-U.S. tariff negotiations, the enhancement of the currency anchor's status of RMB, and the further advancement of RMB internationalization.
张冲, 曹鹏举, 刘瑶. 关税冲击与人民币货币锚地位调整——来自2018—2020年中美贸易摩擦的经验证据[J]. 金融研究, 2026, 550(4): 19-36.
ZHANG Chong, CAO Pengju, LIU Yao. Tariff Shocks and the Adjustment of the RMB's Status as a Currency Anchor: Evidence from the 2018-2020 China-U.S. Trade Friction. Journal of Financial Research, 2026, 550(4): 19-36.
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