The weaponisation of currency has rarely ended well for the United States. Look no further than the unilateral 1971 decision of President Richard Nixon’s administration to cancel the US dollar’s direct international convertibility to gold – a key element of the “Nixon Shock” that destabilized floating currencies and led to stagflation later in the decade. But that hasn’t stopped President Donald Trump’s administration from (mis)labeling China a currency manipulator.
The US has long accused China of keeping the renminbi artificially low, in order to secure an unfair advantage in international trade. But it has generally refrained from harsh action, and, until this latest decision, had not applied the “currency manipulator” label since 1994. Even during the mid-2000s, when the renminbi was widely considered to be significantly undervalued, US President George W. Bush’s administration chose not to make that designation, and instead pursued the bilateral Strategic Economic Dialogue on currency and other economic issues.
But the renminbi’s recent drop below the psychologically significant threshold of CN¥7 to the dollar for the first time since 2008 was too much for the Trump administration to take. So, in a symbolic move that escalates America’s ongoing trade war with China, the US Treasury made the official designation.
It is not at all clear, however, whether the label applies. A country is considered to be a currency manipulator if its monetary authority intervenes to engineer a devaluation, in order to boost the global competitiveness of its exports. The renminbi’s recent decline, however, was not the result of policy action.
Nowadays, China maintains a managed floating exchange-rate regime: the renminbi’s value can fluctuate freely within a 2% band. But, because the authorities reset the exchange rate daily, a long period of weakness gradually moves the exchange rate downward, even if daily movements are marginal. That is what happened this week.
In fact, far from intervening to devalue the renminbi, the People’s Bank of China (PBOC) has in recent years been deploying its foreign-exchange reserves to prop it up. The difference this time is that it chose not to intervene, thereby allowing the currency to fall.
The decision was probably driven largely by China’s longstanding determination to transform the renminbi into a major international currency that is liquid and widely accepted. The country’s leaders know that frequent market interventions undermine the renminbi’s credibility with non-resident holders of the currency. Moreover, those interventions come at a high cost. In 2015-16, supporting the renminbi depleted the country’s foreign-exchange reserves by some $1 trillion.
This is not to say that China will not intervene further. After all, a weak currency is a major problem for China – a point that seems to elude the Trump administration. For one thing, by raising the cost of imports, a weaker renminbi would hurt the domestic demand that China is so eager to foster, as part of its strategy to shift the country’s growth model away from exports.
Moreover, a weak renminbi may trigger capital outflows, at a time when total debt stands at a whopping 300% of GDP. A stronger and more stable renminbi, by contrast, would mitigate the debt exposure of Chinese companies and provincial governments, without jeopardizing financial stability.
Given this, the PBOC is likely to step in if the renminbi falls much lower. But it will be doing so on its own terms rather than to meet a specified target, let alone to please the US, which would nonetheless benefit. In the throes of Trump’s trade war, and following an interest-rate cut by the Federal Reserve, the US could use any growth boost it can get.
Yet, even if China’s interventions are designed to curb depreciation, the Trump administration may nonetheless use them to justify the currency manipulator designation. This points to the dilemma Trump has created for the rest of the world. By treating international trade as a winner-take-all, zero-sum game in which the US makes its own rules, the Trump administration has weakened the incentive for countries to engage in the kind of policy cooperation that has been a hallmark of the international economic order since World War II. Why should China bow to a US that treats it as an economic enemy?
To be sure, it remains unclear whether the US Treasury has advanced the kind of formal proceedings – which normally involve the International Monetary Fund – against China that would usually follow official accusations of currency manipulation. And the Trump administration has a track record of making big threats and then backing away (while claiming credit for averting disaster).
By escalating tensions and fueling uncertainty, however, Trump’s reckless posturing can have serious consequences, even if he does not follow through. At a time when the global economy is slowing down, this is a risk nobody should be willing to take.
Paola Subacchi, Professor of International Economics at Queen Mary Global Policy Institute, Queen Mary University of London, is the author of The People’s Money: How China is Building a Global Currency. This content is © Project Syndicate, 2018, and is here with permission.
11 Comments
"The weaponisation of currency has rarely ended well for the United States."
The United States is responding to the decade-long weaponisation of currency by China.
The doctrine that free trade is always good everywhere is false. Chinese domestic subsidies have wrecked various manufacturing industries in Europe and the United States such as steel manufacturing. The consequences to that cannot be understated, and it's high time the West defended its own economic interests from the Chinese unfair and imbalanced approach to trade.
China doesn't benefit from such belligerence or even need to wreck the US economy, the US is doing that fine by itself with their "free" trade policy.
It is incorrect to suggest US markets are completely 'free' or open, and being wrecked by Chinese devaluation as a result. Their corn subsidies even have deleterious externalities in the form of high-fructose products contributing to an epidemic of diabetes and obesity, in their own population... But I digress...
Journalists love to frame the trade war as ‘Trump’s’. It is simply a result of ‘populism’ and ‘protectionism’.
This is flat out wrong. In the age of Trump, journalists everywhere have a bad case of TDS (Trump Derangement Syndrome), which makes it impossible for them to see the real issues.
And the real issue here is that the US/China trade war is not really about trade. It’s about ideology. It’s about communism versus capitalism.
Because universities are now leftist institutions, the majority of journo’s these days tend to write about China and communism with sympathy. Their contempt for capitalism is obvious.
This is dangerous, because it fails to portray China as it really is. That is, a communist dictatorship trying to cheat and steal its way to economic dominance.
As I’ve said before, China gained entry into the World Trade Organisation on the proviso it would open up its economy and liberalise trade. It didn’t. Instead, it engaged in protectionist policies to amass trillions of dollars in foreign exchange reserves via trade surpluses.
It did so, in part, by trashing its environment and exploiting its workers. The US and other developed nations simply couldn’t compete. Sure, consumers in the West got cheap running shoes, toasters, and computers.
And as Chinese savings were recycled back into the US bond market and interest rates went down, we didn’t notice that it resulted in house prices going up so much that we had to take on mountains of debt to afford one.
But don’t worry. Have you got the latest iPhone?
And thanks to the technological supply chain moving to China too, the communists got to see how advanced technology works. And they stole it.
Now, the Trump administration has said enough is enough. They don’t believe the US should assist the rise of a communist nation.
Hence the trade war. It might be leading to a weakening global economy and wobbly stock markets, but Trump realises it’s in the best interests of the US (and her allies) over the long term.
Another piece from the Fin Review today reports on this issue. I hope you can get past the mild case of TDS coming through in the select quotes below:
‘A defiant Donald Trump has issued a blistering defense of his trade war against a "grifting" China, suggesting any short-term negative fallout was "irrelevant" to the bigger picture.
‘In an impassioned press conference from the White House on Tuesday (Wednesday AEST), Mr Trump insisted yet again that the US economy is "very far from a recession".
‘But he also took aim at economists and other critics of his trade dispute with Beijing — which has been widely blamed for harming the US economy and crunching stock markets.
‘"Somebody had to take China on," a visibly angry Mr Trump seethed.
‘"And it's about time, whether it's good for our country or bad for our country short-term.
‘"Long term, it's imperative that somebody does this."’
The China question is getting more airplay in Australia now too. A few weeks ago, Labour backbencher Andrew Hastie wrote an op-ed in the Sydney Morning Heraldabout China.
Apparently it was controversial. For telling it like it is.
He wrote:
‘We must be intellectually honest and take the Chinese leadership at its word. We are dealing with a fundamentally different vision for the world. Xi Jinping has made his vision of the future abundantly clear since becoming President in 2013. His speeches show that the tough choices ahead will be shaped, at least on the PRC side, by ideology — communist ideology, or in his words, by "Marxist-Leninism and Mao Zedong Thought".
‘Xi’s view of the future is one where capitalism will be eclipsed and "the consolidation of and development of the socialist system will require its own long period of history…it will require the tireless struggle of generations, up to 10 generations".
‘The next decade will test our democratic values, our economy, our alliances and our security like no other time in Australian history.’
Indeed it will. Australia is caught in the middle of this ideological war. China is our largest trading partner, the US is our largest investor and most important ally.
If you’re an investor in commodities, you need to follow this story. If the US gets the upper hand over China (which I think it will), there will be fallout for the Aussie economy in the form of weaker commodity prices, especially for bulk and industrial commodities.
Given we have a coalition government, I think it’s fair to assume we’ll be backing the US in this fight. Perhaps not overtly, but the US is our ally, not China.
To reinforce this point, The Spectator recently wrote about former PM John Howard’s views on China:
‘At a meeting earlier this month with top US officials, he [Howard] described the upheaval in Hong Kong as ‘a glimpse of the future for Chinese society’ and questioned the long-term viability of China’s economic and political system. ‘Australia’s relationship with Beijing is becoming more difficult because the regime in China is a lot more authoritarian’ and that we should not be mesmerised by China’s ‘overwhelming economic importance to Australia’.
In other words, trade isn’t everything. Ideology is.
Regards,
Signature
Greg Canavan,
I like how you compare President Trump to President Nixon.
Those Democrats ruined the US. Hillary Clinton sold roughly 20 percent of America’s Uranium supply to Russia in exchange for $145 million in donations to the Clinton Foundation. Obama doubled America's debt taking it from $10.626 trillion to $19.947 trillion.
Nixon took office in the midst of the Cold War. Trump took office in the midst of the Ongoing Great Recession.
China's acting like the little cousin who you helped out and now they've gotten angry because they want more, but they're just really angry and ugly about it.
I like how you identify problems with right wing/republican policy, like finance sector subservience and selling critical assets, and then blame Hillary Clinton for it.
The Uranium One conspiracy you're talking about is fake news from breitbart. No evidence has been supplied of bribes or misconduct, it's an old, debunked conspiracy theory at best, and anti-american liberal propaganda at worst. Uranium One is a Canadian company anyway.
It's the two sides to the same coin:
https://www.washingtonpost.com/news/fact-checker/wp/2016/10/26/the-fact…
The entire usage of the word "free" in relation to economics, is a charade.
Markets are not free, they are regulated.
A 2% band is not free floating.
Intervention by definition, means not free.
When markets crash, or threaten to, governments and central banks prop them up by printing more or saving banks by adding to public debt.
Banks and car makers get huge bailouts.
Capitalis mobile because governments caved to financiers and capital and ALLOWED this from 1980-87.
Labour does not have the luxury of mobility across borders, to more than a limited extent.
Hence, capital has it all its own way, since 1980.
So, income is replaced by debt. And who makes money on debt?
Governments have to pay huge interest to finance on debt also.
USA pays about $660 bullion a year in interest on its debt.
Nice work if you can get it....
Gold is not the barbarous relic, finance is.
China, under WTO rules, is not allowed to fix its rate of exchange. It has done so for 18 years.
Some people cannot see, or refuse to acknowledge, the bleeding obvious.
China rise is due to CCP direction, not private enterprise or "free" markets
This direction rests on dictatorship and approaching totalitarian societal governance.
This does not seem to bother some commentators, was long as they buy NZ dairy.
Journalists love to frame the trade war as ‘Trump’s’. It is simply a result of ‘populism’ and ‘protectionism’.
This is flat out wrong. In the age of Trump, journalists everywhere have a bad case of TDS (Trump Derangement Syndrome), which makes it impossible for them to see the real issues.
And the real issue here is that the US/China trade war is not really about trade. It’s about ideology. It’s about communism versus capitalism.
Because universities are now leftist institutions, the majority of journo’s these days tend to write about China and communism with sympathy. Their contempt for capitalism is obvious.
This is dangerous, because it fails to portray China as it really is. That is, a communist dictatorship trying to cheat and steal its way to economic dominance.
As I’ve said before, China gained entry into the World Trade Organisation on the proviso it would open up its economy and liberalise trade. It didn’t. Instead, it engaged in protectionist policies to amass trillions of dollars in foreign exchange reserves via trade surpluses.
It did so, in part, by trashing its environment and exploiting its workers. The US and other developed nations simply couldn’t compete. Sure, consumers in the West got cheap running shoes, toasters, and computers.
And as Chinese savings were recycled back into the US bond market and interest rates went down, we didn’t notice that it resulted in house prices going up so much that we had to take on mountains of debt to afford one.
But don’t worry. Have you got the latest iPhone?
And thanks to the technological supply chain moving to China too, the communists got to see how advanced technology works. And they stole it.
Now, the Trump administration has said enough is enough. They don’t believe the US should assist the rise of a communist nation.
Hence the trade war. It might be leading to a weakening global economy and wobbly stock markets, but Trump realises it’s in the best interests of the US (and her allies) over the long term.
Another piece from the Fin Review today reports on this issue. I hope you can get past the mild case of TDS coming through in the select quotes below:
‘A defiant Donald Trump has issued a blistering defense of his trade war against a "grifting" China, suggesting any short-term negative fallout was "irrelevant" to the bigger picture.
‘In an impassioned press conference from the White House on Tuesday (Wednesday AEST), Mr Trump insisted yet again that the US economy is "very far from a recession".
‘But he also took aim at economists and other critics of his trade dispute with Beijing — which has been widely blamed for harming the US economy and crunching stock markets.
‘"Somebody had to take China on," a visibly angry Mr Trump seethed.
‘"And it's about time, whether it's good for our country or bad for our country short-term.
‘"Long term, it's imperative that somebody does this."’
The China question is getting more airplay in Australia now too. A few weeks ago, Labour backbencher Andrew Hastie wrote an op-ed in the Sydney Morning Heraldabout China.
Apparently it was controversial. For telling it like it is.
He wrote:
‘We must be intellectually honest and take the Chinese leadership at its word. We are dealing with a fundamentally different vision for the world. Xi Jinping has made his vision of the future abundantly clear since becoming President in 2013. His speeches show that the tough choices ahead will be shaped, at least on the PRC side, by ideology — communist ideology, or in his words, by "Marxist-Leninism and Mao Zedong Thought".
‘Xi’s view of the future is one where capitalism will be eclipsed and "the consolidation of and development of the socialist system will require its own long period of history…it will require the tireless struggle of generations, up to 10 generations".
‘The next decade will test our democratic values, our economy, our alliances and our security like no other time in Australian history.’
Indeed it will. Australia is caught in the middle of this ideological war. China is our largest trading partner, the US is our largest investor and most important ally.
If you’re an investor in commodities, you need to follow this story. If the US gets the upper hand over China (which I think it will), there will be fallout for the Aussie economy in the form of weaker commodity prices, especially for bulk and industrial commodities.
Given we have a coalition government, I think it’s fair to assume we’ll be backing the US in this fight. Perhaps not overtly, but the US is our ally, not China.
To reinforce this point, The Spectator recently wrote about former PM John Howard’s views on China:
‘At a meeting earlier this month with top US officials, he [Howard] described the upheaval in Hong Kong as ‘a glimpse of the future for Chinese society’ and questioned the long-term viability of China’s economic and political system. ‘Australia’s relationship with Beijing is becoming more difficult because the regime in China is a lot more authoritarian’ and that we should not be mesmerised by China’s ‘overwhelming economic importance to Australia’.
In other words, trade isn’t everything. Ideology is.
Regards,
Signature
Greg Canavan,
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