The next frontier of the US-China trade war could be currency manipulation

China’s yuan fell in H1 2018—but not because of manipulation.
China’s yuan fell in H1 2018—but not because of manipulation.
Image: Reuters/Aly Song
We may earn a commission from links on this page.

The US already has a trade war with China on its hands. Recent signals from the Trump administration suggest it may be gearing up to accuse China of currency manipulation, too.

Last week, Treasury secretary Steve Mnuchin said that he had “expressed concern” to China about the yuan’s sharp slide against the dollar. The Chinese currency has lost 10% against the greenback since late March.

“As we look at trade issues, there is no question that we want to make sure China is not doing competitive devaluations,” Mnuchin said on the sidelines of the IMF, World Bank, and G20 meetings in Bali.

The secretary’s remarks are particularly worth parsing as the Treasury prepares to issue its semi-annual report to Congress on currency manipulators this week. In line with thresholds set out in two US trade laws, the report calls out countries that cheapen their currencies, giving their exports a competitive advantage over other countries’ goods.

The period covered by the report will look at the first half of 2018. During this time, despite Mnuchin’s insinuations, China did not weaken its currency in a meaningful way—and certainly not in a way that harmed the US. It’s vital that the Treasury’s report say so. Stating otherwise would hamstring the important progress the Trump administration has made so far in setting out clear, fair guidelines for foreign exchange management.

In the past, currency manipulation helped deal a lasting blow to the American economy—especially manufacturing, which had to compete more than other sectors against Chinese goods. US leadership on the issue would ultimately benefit not only working Americans; by encouraging more productive investment of capital, it would also bolster long-term global growth. However, if there’s hope for the Trump administration to spearhead real change, it must avoid politicizing the objectives for naming manipulators—and that’s exactly what naming China as one would do.

To understand why, it helps to understand what the report is all about. To be considered a currency manipulator, a country must meet three criteria set forth in the 2015 Trade Act (pdf): its bilateral trade surplus with the US must meet or exceed $20 billion; it must run a current account surplus of more than 3% of its GDP; and it must have made purchases worth more than 2% of its GDP to weaken its currency.

The Treasury department also takes into account two distinct—and much broader—factors laid out in a 1988 trade law (pdf): a large current account surplus and a big trade surplus with the US.

So how does China stack up?

In the first half of 2018, China ran a goods trade surplus of around $185 billion with the US. However, it met neither of the other two criteria from the 2015 Trade Act. (China intervened only sporadically in currency markets—and at that, to strengthen the yuan, not weaken it.)

There’s less certainty over whether the Treasury could invoke the wider-ranging criteria of the 1988 law to accuse China of manipulation, as FT Alphaville recently highlighted (registration required). Because China is huge, so is the absolute value of its bilateral trade surplus with the US. However, it ran a current account deficit in the first quarter of 2018, according to the OECD.

Naming China a manipulator on the basis of the 1988 criteria would break with past norms. Under former US president Barack Obama, the Treasury department typically mentioned the law only in footnotes. However, since Trump took office, the departments’ reports have discussed the 1988 thresholds in much more detail.

Doing so would defy the spirit of the 1988 law—which was meant to determine whether countries tweaked exchange rates to prevent “effective balance of payments adjustment or [gain] unfair competitive advantage in international trade.” Certainly, China did that with abandon throughout much of the 2000s—and the US should have done more about it at the time.

But if the Trump administration wants to encourage countries to stop unfairly cheapening their currencies, it must build credibility by sticking to its own standards. And by those, China’s conscience—at least in the first half of 2018—is clear.