The U.S. Treasury just declared that the People’s Republic of China is not a currency manipulator. As an economic analysis, the decision was unremarkable. But in an era in which economics often gets pushed aside in favor of base political urges, it can be unusual to see facts prevail this way.
Politically, the question of whether China manipulates its currency is often dissociated from any actual behavior on the part of the Chinese government.
{mosads}Instead, it serves as a proxy for whether a candidate is concerned about Chinese economic behavior. That, in turn, may be a proxy for whether a candidate is concerned about the plight of manufacturing workers.
Thus, as a candidate for president in 2016, Donald Trump accused China of manipulating its currency. He repeated the accusation in August of 2018.
Earlier this month, Sen. Tammy Baldwin (D-Wis.), currently up for re-election, urged the president to “make good on your promise to name China a currency manipulator and begin the statutorily-required process to encourage China to correct its undervaluation.”
Yet the Treasury demurred. As it explains in its report, there is 2015 legislation that sets out three specific criteria for “currency manipulation.” Specifically, to be a currency manipulator, the Treasury asks whether:
1. The country runs a significant bilateral trade surplus with the United States;
2. The country runs global trade surplus of at least 3 percent of its GDP;
3. The country has been persistently and significantly purchasing foreign currencies to weaken its own.
China meets the first criterion, but not the latter two. The Treasury reports a bilateral surplus of $390 billion in the four quarters through June 2018. Yet, over this same period, China’s overall trade surplus fell to 0.5 percent of GDP.
That level is well within a normal range, very close to balance, and well down from a peak level of 10 percent in 2007. Further, the Treasury report grudgingly notes that, rather than purchasing foreign currencies to weaken China’s RMB, it appears that Chinese authorities have actually been taking measures to strengthen the currency.
The report also quotes the International Monetary Fund (IMF) as concluding that “the RMB is broadly in line with economic fundamentals” (i.e. not undervalued).
While these facts would seem to be clear and dispositive, the anguished report reveals several important tensions coursing through Trump administration international economic policymaking.
First, there is the balancing of economics and politics. While the evidence seems to exculpate China, that is a politically treacherous finding.
Thus, the report carefully recounts past surpluses that China has run, previous instances of currency intervention, “pervasive” subsidies and unfair practices and a lack of transparency and balance in its exchange intervention.
None of these are particularly relevant for the decision at hand, but the report authors appeared acutely aware of the political peril of finding China not guilty of currency manipulation.
Second, there is the particularly Trumpian problem of favoring bilateral policies in a multilateral world. When the report notes China’s disappearing overall trade surplus, it remarks that this balance “remains unevenly spread among China’s trading partners.”
From an economic standpoint, this makes no sense; there is no reason whatsoever that trade should be balanced with all trading partners. In fact, the ability to move away from barter constraints and to buy more from one trading partner and sell more to another is a key sign of a healthy trading system. But it runs counter to President Trump’s dogma.
This contrast between a bilateral and multilateral analysis can be seen when tracing China’s currency experience. The most readily-observable measure of China’s exchange rate is the number of RMB it takes to buy a dollar — the bilateral exchange rate.
Over the last five years, this averaged 6.46 RMB to the dollar and was 6.94 RMB/dollar this week. That’s a recent depreciation of about 7 percent.
But China trades with many more countries than the United States, the dollar has been strong in recent years and a proper exchange rate analysis factors in inflation.
A broader index of China’s real exchange rates against the world shows that its currency had depreciated less than 1 percent against its five-year average, as of August, and the RMB is still more than 20 percent stronger than it was in 2010.
Although the bilateral numbers were hardly incriminating for China, the more significant multilateral numbers were even less so.
Perhaps the Treasury decision was obvious; after all, the agency has declined to name China a manipulator for decades. Yet, in an era when political pressures tend to trample economic arguments, the report was the rare recent instance in which economics trumped politics. That is remarkable.
Philip Levy is a senior fellow on the global economy at The Chicago Council of Global Affairs and an adjunct professor of strategy at the Northwestern University Kellogg School of Management.