Moneybox

Trump’s Decision to Call China a Currency Manipulator Is Absurd and Maybe Meaningless

 Donald Trump and President Xi Jinping walking different directions away from a negotiating table.
Not friends.
Brendan Smialowski/Getty Images

On Monday night, the Trump administration announced that it would take the unprecedented step of officially labeling China a currency manipulator, once again escalating the trade war between Washington and Beijing that has thrown global markets into turmoil.

This is an idea that American politicians have talked about for ages, but no U.S. president has ever been willing to move forward on. At one time, it might have marked the beginning of a dramatic confrontation between the world’s two top economic powers. But the timing now is a bit silly, as it’s been years since China actually fit the typical definition of a currency manipulator, and calling it one today probably won’t change much about the trade battle that’s already underway. More than anything, it’s a fairly low-stakes rhetorical move in a high-stakes economic showdown.

When economists say a country is manipulating its currency, they usually mean that its government is systematically tinkering with exchange rates in order to gain an unfair advantage in trade. At one time, that described the Chinese government’s policy pretty well. Through much of the early and mid 2000s, Beijing purposely kept its currency, the renminbi (aka the yuan), cheap in order to boost its exports. Officials did this by buying mass quantities of U.S. Treasury bonds in order to push up the relative value of the dollar. It was during this period that labeling China a currency manipulator became a popular rallying cry among U.S. labor activists and trade-skeptical politicians, including our current president.

But times change, and so do currency regimes. China still closely manages the value of its money—every day, the country’s central bank sets a midpoint called “the fix” and allows the renminbi to trade in a tight band around it, jumping in to buy and sell as necessary to keep it within the desired range. But these days, Beijing mostly uses its resources to prop the renminbi up, not push it down. If officials let the country’s currency float on the open market, the way the U.S. dollar does, it would almost certainly crash immediately, which would be terrible for American manufacturers.

In other words, China has actually been doing U.S. companies a favor by putting a floor under the renminbi. As Brad Setser, a senior fellow at the Council on Foreign Relations, told me, “It’s clearly the wrong time to call China a currency manipulator.”

There are a few reasons why the renminbi would fall right now if left to its own devices. For one, China’s economy is weaker than it used to be, and weaker economies tend to have weaker currencies. Second, wealthy Chinese are trying to invest more of their fortunes outside of the country’s borders, which means selling selling domestic currency and buying things like real estate in Vancouver or New York. And finally, there’s the trade war itself. When a country’s exports fall, so too does the value of its money. Every time Donald Trump slaps a new tariff on Chinese goods, he’s also putting downward pressure on China’s currency.

The chances that our president, who regularly accuses China of currency manipulation on Twitter, realizes any of this seem vanishingly small. But his advisers almost certainly understand the reality of the situation. While Trump vowed to declare China a currency manipulator on day one of his administration, the Treasury Department has refrained from doing so in its reports.

Which brings us back to this week.

The Trump administration said that it would officially label China a manipulator on Monday after the renminbi dropped below the symbolically important mark of 7 yuan to $1. Beijing allowed its currency to fall after the Trump administration announced an aggressive new round of tariffs on Chinese goods. The country’s central bank denied that it was retaliating over the new levies, claiming instead that it was simply a natural response to market conditions. But the most obvious interpretation was that China was sending a warning shot, a reminder of what would happen if its central bank stepped aside and allowed its currency to fall. As if to emphasize the point, officials pushed the renminbi’s value back up a bit on Tuesday.

Long story short: Donald Trump decided to call China a currency manipulator after its government decided to remind everybody what would happen if it got out of the way and let the market do its bidding. What Trump really wants is for China to more actively support its currency.

How much any of this really matters in the scheme of things is a bit unclear. At one time, officially labeling China a currency manipulator might have been seen as an opening salvo in a potential trade war between the two countries, which is part of why the Bush and Obama administrations chose not to do it, opting for less confrontational forms of engagement. But it’s 2019, and the trade war is already raging. And as Setser has written, neither of the statutes that would let Trump declare China a manipulator would give him any important new legal tools to sanction Beijing. One of them requires the administration to pick from a list of punishments much less severe than the tariffs it has already put in place. The other—I kid you not—only calls for negotiations with whichever country is supposedly guilty of manipulation. Obviously, we’ve been negotiating with China over lots of things for a while now.

So why bother? As always, one can only guess at the administration’s strategy, if there is any. But my guess is that White House’s advisers may view labeling China a currency manipulator as a low-impact way for Trump to strike back in what’s becoming an economically dangerous cycle of tit-for-tat trade retaliation. It might sound dramatic. But it’s better than more tariffs.

Correction, Aug. 6, 2019: This post originally misstated that one of the legal tools for declaring China a currency manipulator doesn’t proscribe a specific punishment. It lets the Trump administration pick from a list of punishments that are less severe than the tariffs already in place.