Trump's Attack on China's Currency Policy
President Donald Trump has forced Secretary of the Treasury Steven Mnuchin to label China a “currency manipulator,” despite the absence of any evidence to that end. China did manipulate from 2003 to 2013, intervening massively in the foreign exchange markets to strengthen its competitive position by buying dollars to hold the renminbi down. Since then, however, it has on balance intervened heavily on the other side of the market: selling dollars to keep the renminbi from weakening and thereby supporting American rather than Chinese competitiveness. China has manipulated in favor of the United States for the past five years or so.
Over the past few days, however, China has apparently withdrawn some of its support from the renminbi and let its exchange rate weaken a bit further. This depreciation is due to market forces: Trump’s tariffs push the dollar up against all currencies, the Chinese currency weakens as a result of the trade hit, and China will undoubtedly lower its interest rates to counter that slowdown. There is no evidence that China has sold renminbi for dollars to overtly push its exchange rate down. Hence there is no justification for designating China a “manipulator.”
Treasury has announced that it will “engage with the International Monetary Fund” on the issue. To obtain IMF support, it would have to convince the membership that China was in fact manipulating. Since it is not, IMF action is highly unlikely. Even in 2007–08, when China was manipulating extensively, the IMF was unable to take action. In any event, the IMF could only launch a consultation with China to try to persuade it to change its policies. Designating China as a “currency manipulator” is, therefore, toothless as well as fallacious.
The major risk is that Trump will use the “currency manipulator” designation to justify a further escalation of his trade war against China. He could increase the level of tariffs on US imports already covered or on those about to be covered on September 1, 2019. The trade war could morph into a currency war and further damage the world economy and the United States itself.