How China’s currency manipulation cheats America on trade

From his first day in office, President Trump has made economic security a central part of his administration’s active efforts to put America First. Tax cuts, renegotiated trade deals, rollbacks of job-killing regulations and a resurgence of American manufacturing have propelled the American economy to new heights, with the Dow Jones Industrial Average and S&P 500 hitting all-time highs nearly 200 times since Election Day 2016. 

Reaching these achievements was no small task. At every turn, the Trump administration had to challenge conventional economic wisdom that, for years, put the interests of coastal elites ahead of the interests of America and its workers. 

Nowhere has this been truer than in the realm of international trade. In his ongoing fight to fix this broken system, President Trump pointed out an unfair, dangerous game that competitor nations play in order to gain an edge in trade: currency manipulation.

But what exactly is currency manipulation? And how do China’s actions to devalue its currency, the Renminbi, impact international trade, particularly with the U.S.?

Currency manipulation occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency to influence its relative value. 

Say in a simple world that the exchange rate between U.S. Dollars (USD) and Chinese Renminbi (RMB) is 1 to 5, meaning 1 USD is worth 5 RMB. Over time, China’s economy performs well and the RMB strengthens against the USD due to market forces, making 1 USD worth 4 RMB. 

The stronger RMB carries with it more buying power, as all goods and services at a fixed price point become relatively cheaper when paying with the stronger RMB. If American soybeans were priced by the market at 1 USD per pound before the RMB appreciated, it is clear how the stronger RMB would make it advantageous for China to buy soybeans at this rate from the U.S.

If China were a large importer of American goods, neither nation would complain too much about this arrangement. But as China is a net exporter, with a positive trade balance of $379 billion with the U.S. in 2018 alone, having a “strong” currency flips the benefits in the scenario we see above. 

Imagine instead that China were trying to export soybeans to the U.S. and market forces set the price of Chinese soybeans to 5 RMB per pound, exactly equivalent as before in China’s currency. When the exchange rate changes, U.S. consumers would now be faced with paying $1.25 per pound for soybeans imported from China, as the price set by the market does not move in tandem with the relative strengthening of China’s currency.

Americans, naturally, would instead buy from other nations at lower relative prices, taking away large swaths of business from Chinese exporters.

The stronger RMB relative to the USD would make Chinese goods less competitive abroad—and, as China is a huge net exporter, this could spell disaster for China’s economy.

This is where currency manipulation comes into play. With the People’s Bank of China taking action over several years to reverse the market forces that strengthened the RMB as China’s economy grew, China gained a systemic advantage in international trade by using currency manipulation to flood markets with artificially low-priced exports.

Simultaneously, in an effort to protect the development of nascent domestic industries, manipulation of the RMB created significant non-tariff barriers to foreign nations seeking to get involved in this large emerging market, by keeping imports artificially costlier than Chinese products.

Such actions went unchecked for years, leading China to become the global trade and manufacturing powerhouse it is today. However, under President Trump, the U.S. finally is beginning to take steps toward holding China accountable for its misbehavior.

The Treasury Department under Secretary Mnuchin has made clear the “significant concerns” the U.S. has about China’s behavior regarding its currency. The RMB has fallen 8 percent against the USD in the past year alone, suggesting manipulative behavior in response to ongoing trade conflicts. Likewise, the opaqueness with which China handles its foreign currency transactions makes it impossible for any third-party to discern what the central bank is actually doing to its currency beyond the official statements of the People’s Bank. These facts, in addition to the large, persistent bilateral trade surplus with the United States, provide reason for China to remain on a Treasury Department monitoring list of nations suspected of manipulating their currencies to uphold an edge in international trade.

As trade talks start to resume, and negotiations over currency manipulation continue, President Trump is right about how the U.S. needs to start thinking outside the box to level the playing field internationally for the benefit of America’s farmers, ranchers, manufacturers and workers.

Whether it be through legislation such as the much-needed United States Reciprocal Trade Act, putting America on equal footing abroad when it comes to tariffs, or through new monetary policies such as countervailing currency intervention to counteract currency manipulation by competitor nations, the time has come to put politics and precedent aside to win on trade for Americans.

Cheating nations will not change their ways on their own—and, while this may sound like news to the political establishment, Trump and his administration have realized this fact from day one. 

Whether it be tariffs, non-tariff barriers, currency manipulation or government subsidies, Trump will continue to fight all forms of trade misbehavior that China and other nations have used to take advantage of American consumers for years to deliver on his promise to put America first.

Corey R. Lewandowski is President Trump’s former campaign manager. He is a senior adviser the Great America Committee, Vice President Mike Pence‘s political action committee. He is co-author with David Bossie of the new book, “Trump’s Enemies,” and of “Let Trump Be Trump: The Inside Story of His Rise to the Presidency.” Follow him on Twitter @CLewandowski_.