The US Treasury’s semi-annual report issued this week on the exchange rate policies of China and other major trading partners is an exercise in intellectual gymnastics. The report reiterates that China was indeed a currency manipulator, as Treasury declared in August 2019, but then states it has magically ceased to be one now that the two nations are ready to sign the “Phase One” trade deal this week in Washington.
In fact, under any reasonable reading of US law, China has refrained from manipulating its currency for the past decade or more. The administration’s declaration over the summer was more a negotiating tactic designed to pressure China to sign a trade agreement, and its reversal of that finding in the latest currency report is not based on any real change in evidence.
What this flip flop is not, is a good faith application of US trade law. The Omnibus Trade and Competitiveness Act of 1988, in Section 3004(b), directs the Secretary of the Treasury to “analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
The 2015 Trade Facilitation and Trade Enforcement Act further directs Treasury to focus on major trading partners that meet three criteria: 1) a bilateral trade surplus with the United States that is at least $20 billion over a 12-month period; 2) a current account surplus that is at least 2 percent of its Gross Domestic Product over a 12-month period; and 3) “persistent, one-sided intervention” in foreign currency markets, with net purchases of foreign currency conducted repeatedly, in at least 6 out of 12 months, and totaling at least 2 percent of its domestic GDP over a 12-month period.
China meets only one of those three criteria. It’s run big bilateral trade surpluses with the United States for years, but its current account surplus is below 2 percent of GDP and it hasn’t come anywhere close to engaging in “persistent, one-sided intervention” to depress China’s currency, the renminbi (RMB). Instead, Treasury had to fall back on the more vague 1988 trade act, citing a grab bag of policies by China that somehow added up to currency manipulation at the end of last summer.
It’s true that the RMB was weakening at the end of the summer, but its decline was easily explained by the weakening of fundamentals in the Chinese economy. As the Treasury report notes, the slowing Chinese economy has seen an uptick in net outflows of capital, putting further downward pressure on the RMB as Chinese investors seek foreign currency to buy foreign assets.
While there is some evidence that China’s state banks have been buying foreign currency, Treasury notes that China’s official central bank “appears to have largely refrained from intervening in foreign exchange markets in 2019.” As evidence, China’s official foreign exchange reserves remained roughly unchanged during the year. In the eyes of the US Treasury, the chief sin of China’s central bank is that it did not intervene to stop the RMB’s depreciation.
The Treasury report correctly notes that China has been guilty of currency manipulation in the past.
But since 2005, China’s currency has appreciated significantly, to where today the International Monetary Fund considers it only slightly undervalued. According to the IMF, the currencies of Korea, Singapore, and the Eurozone are more undervalued than the RMB.
Even if China did meet the criteria, currency manipulation is an exaggerated problem. Countries cannot make themselves wealthy by devaluing their currencies. In fact, a strong currency is often evidence that a strong economy that is attracting foreign investment. By contrast, a weak currency means its citizens must pay relatively more for imports, driving up the cost of living for workers and the cost of production for industries, like automakers, that use imported parts and goods.
If the Trump administration is convinced that weak currencies are a way of gaining an unfair advantage in trade, it should examine its own policies. The huge and growing US federal budget deficit has attracted hundreds of billions of dollars in foreign savings, increasing demand for the US dollar. Relatively “safe” US assets have also been made more attractive by global economic uncertainty—uncertainty stoked in part by this administration’s own aggressive tariff wars—further driving up the value of the dollar.
Instead of misapplying US trade law, the Trump administration should work with Congress to control federal spending, reduce the budget deficit, and thus reduce the fiscal pressure behind the stronger US dollar. It should also seek trade détente with China and our other major trading partners, working to lower trade barriers rather than raising them, both to increase economic efficiency and reduce the uncertainty that has weighed on global markets. And it should follow the plain language of US law on currency manipulation, saving the designation for those misguided trading partners who really do engage in persistent, one-sided intervention to depress their own currencies.
Frederic J. Brown/AFP via Getty Images