Trump’s currency war without a cause

US Dollar and China Yuan notes are seen in this picture illustration 2 June 2017. (Photo: Reuters/Thomas White)

Author: Yiping Huang, Peking University

The greatest economic damage of the ongoing trade war between China and the United States is caused by policy uncertainty, not import tariffs. In early August 2019, US President Donald Trump introduced some new shocks. Amidst the new round of trade talks between the two countries, Trump announced that the United States will start putting tariffs of 10 per cent on the remaining US$300 billion of goods imported from China. Quickly following that, the US Treasury Department designated China as a ‘currency manipulator’.

This currency war reminds me of an old Chinese saying: ‘Even when right a scholar cannot win an argument with a soldier’ — because it defies any common sense about currency manipulation. At one of the earlier G20 meetings, a US official warned that the United States would name China a currency manipulator if it did not intervene to hold up the value of Chinese renminbi (RMB). In fact, it would have been more appropriate to label China the ‘currency non-manipulator’.

The US Treasury Department usually follows three criteria to determine if a trading partner is a currency manipulator — the first is a bilateral trade surplus with the United States of more than US$200 billion; the second is a current account surplus of more than 3 per cent of GDP; and the third is a total purchase of foreign exchange equivalent to more than 2 per cent of GDP within 12 months.

Of these, China only satisfies the first criterion. And even this one needs to be looked at with caution. It is widely known that China’s bilateral trade surplus with the United States is a result of the global supply chain, as its overall trade account is almost balanced. And even this bilateral surplus is shrinking rapidly.

The US Treasury’s action might have been triggered …continue reading