Analysis & Opinions - The Wall Street Journal

Currency Manipulation Isn’t Among China’s Trade Sins

| Oct. 15, 2018

The yuan is sliding against the dollar, but mostly as a result of U.S. policies like high spending and tariffs.

The Trump administration is railing against Chinese currency manipulation without any regard for the yuan’s actual ups and downs. Yes, the numbers superficially back Treasury Secretary Steven Mnuchin’s warnings: The yuan has dropped about 10% against the dollar since mid-April, effectively offsetting the impact of U.S. tariffs on Chinese goods. But this doesn’t prove that China is defying the laws of market economics. In fact, Beijing is doing precisely the opposite.

One law of economics: Fiscal expansions and monetary contractions strengthen currencies. The U.S. raised spending and cut taxes more than $200 billion in 2018. It’s the only major economy undertaking this type of fiscal expansion. At the same time, the Federal Reserve has been raising interest rates and selling off assets. Meantime, interest rates are still stuck at zero or below in Europe and Japan. They are hovering below 1% in the United Kingdom. It is no surprise, then, that America’s currency has strengthened by an average of more than 7% against those of its trading partners since April. The yuan is only one of many currencies left weakened against the dollar.

Another law of economics explains why China’s currency has slid somewhat more against America’s than the euro or the yen. Tariffs depreciate the currencies of countries they’re imposed on, because decreasing imports lowers demand for the exporter’s currency. China’s retaliatory tariffs have an offsetting effect. Yet the U.S. imports more from China than it exports, so its tariffs are levied on a larger base. Rising oil prices have compounded the downward pressure on its currency.

Regardless of whether Beijing put its thumb on the scale, U.S. policy and shifting economic fundamentals have weakened the yuan against the dollar. And it’s worth noting that there are no direct signs of such manipulation.

The Treasury Department’s definition of currency manipulation includes three criteria. First, a country has to maintain a current-account surplus above 3% of gross domestic product. The last time China exceeded this threshold was in 2010. Though China’s current-account balance swings significantly over time, it generally has continued a dramatic fall that began in 2008, dropping to a projected 0.7% of GDP in 2018, according to the International Monetary Fund. This is well below Treasury’s threshold and about half the level from a year ago.

Second, a country has to persist in a one-sided intervention—buying dollars to weaken its exchange rate. Yet China currently is selling dollars to prop up its exchange rate in the face of downward pressure, as it did in 2015 and 2016. Beijing’s overall policy in recent years has been aimed more at stabilizing the exchange rate than attempting to set it at any particular value. This means China is currently working to slow the yuan’s depreciation—precisely the opposite of the currency-manipulation charge.

The only one of Treasury’s three criteria for currency manipulation that China currently meets is a bilateral goods surplus of more than $20 billion. But this criterion is widely regarded as economic nonsense. The bilateral trade imbalance is related more to the U.S. domestic-savings deficit and global supply chains than to China’s trade or exchange-rate policy. The Treasury measure also ignores services, in which the U.S. has a surplus.

Consider that when China imports chips and screens from other Asian countries, and assembles the components before exporting finished products to the U.S., the entire value of the goods is debited from the U.S.-China bilateral balance. A fixed-dollar threshold also makes little sense when America’s trading partners vary so much in size. The same $20 billion value applies to China’s $13 trillion GDP and Switzerland’s $700 billion economy. Regardless, under Treasury’s rules a trade manipulator must meet all three criteria. China clearly does not.

The U.S. stands on solid ground in pushing China to adopt a more transparent, rule-based economic system. Much of Beijing’s policy toward inbound investment violates international norms. But when it comes to China’s exchange rate, the U.S. has gotten its wish but now is complaining about the result. These days, President Trump is likelier than Chinese President Xi Jinping to extol the value of a weak currency. But Mr. Trump’s cheap talk has been much less potent than his combination of deficit spending and tariffs, which created the strong dollar he is lamenting.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Furman, Jason.“Currency Manipulation Isn’t Among China’s Trade Sins.” The Wall Street Journal, October 15, 2018.

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