It was one of President-elect Trump’s repeated themes during his campaign: that China is undervaluing its currency to gain an unfair trade advantage over the US. And he’s promised to fight back with tariffs and taxes on Chinese imports. He’s not the first person to talk about this on the campaign trail. It’s a tradition as sacred as visiting the Iowa State Fair and eating whatever the heck this thing is.
That’s why I love America. Because if you want to be president, you must first seek the blessing of the great butter cow.
So, on day one, the president will label China a currency manipulator? Let’s be real, on day one of a new job, everyone is still trying to get their act together. I once spent six hours waiting for IT to get me a computer. But I’m sure that won’t happen at the White House, because the US government is a bastion of efficiency.
Anyway, is China a currency manipulator? Well, it’s complicated. For years, China had a fixed exchange rate. I know, this already sounds incredibly boring. But stay with me. A fixed exchange rate meant that the yuan—the Chinese currency—would always be worth the same amount to the dollar. From 1994 through 2004, it was 8.26 yuan equals 1 dollar.
Now, other countries have fixed exchange rates too. The issue is that as China’s economy grew rapidly, the central bank kept their yuan fixed at the same low rate, so it was worth less than it should have been. Which meant that Chinese-made stuff was artificially cheaper. So more and more American companies moved their manufacturing to China, where they could get more bang for their buck. And by bang, I mean, yuan. You could literally pay people in China a fraction of what you would pay in America. And all that extra money? Profit!
So China kept its people poor to boost its manufacturing and exports. And America gained cheaper goods that led to a trade deficit with China while losing manufacturing jobs. Which is the real reason US presidential candidates always talk about China manipulating its currency.
Now in 2005, China stopped fixing the yuan to the dollar. But they still heavily manage its exchange rate. They control how much it can change each day, and buy and sell foreign currency to affect the price of the yuan. In fact, China’s central bank has the largest foreign exchange reserves in the world. In 2014, they owned 4 trillion dollars in foreign currency.
So yes, China manipulates its currency. But. Here’s where it gets tricky. In the last few years, China’s been going through an economic slowdown. And people are moving massive amounts of money out of the country. Both of those things make the yuan less valuable. And the US economic recovery means the dollar the strongest it’s been in 13 years.
So in the last couple years, China’s been trying to manipulate its currency the other way. Now it wants its currency to be stronger, to keep it from falling against the dollar. That’s because if the yuan falls too quickly, it could crash China’s economy.
In fact, the Chinese government has spent almost a trillion dollars of their foreign reserves trying to slow down the slide. And it’s still falling. Ironically, if the Chinese central bank stopped manipulating its currency right now, it would have the exact opposite effect of what Trump and other US politicians want.
So what would happen if Trump does get the Treasury Department to officially label China a currency manipulator? Well, under a law passed in 2015, the Treasury would have to spend a year negotiating with the Chinese government. And then they still could do almost nothing meaningful to stop it. Separately, Trump could still put tariffs on imports from China, but that’d be a whole ‘nother episode.
Here’s the thing. When Trump and other US officials talk about China gaming the system against the US, they’re right. For example, we’ve talked before on this show about how Chinese companies steal US technology for profit with the help of the Chinese military. That sucks trillions from the US economy every year. But officially labeling China a currency manipulator at this point won’t really achieve anything meaningful.
So, what do you think? Leave your comments below.