Why label China a
currency manipulator now? Well, it is something
that administrations have considered in the United
States for close to 20 years. It is something that the Trump
administration has been talking about since the very beginning
of the administration, but it kind of
fell off the radar. Donald Trump made it very
clear that it was something he wanted to do, and then was
talked out of it internally, and it wasn’t really a part
of the early trade discussions within the administration. But now a lot of the people
who resisted have left and it looks like other
people who have resisted – people like Steve
Mnuchin at Treasury and Robert Lighthizer at the US
Trade Representative’s Office – have given in to this demand. So, why now? The problem for the
United States Treasury and for the White
House is there aren’t a lot of really good
options to do anything about the value of the
yuan versus the dollar, and here’s the reason why. The dollar is overvalued
against a bunch of different currencies. The dollar is
overvalued in general. The United States is about
25 per cent of global trade, but the dollar itself is
used, it says, for about 60 per cent of central
bank reserves. It’s a comparable percentage. We think about 50 per
cent to 60 pe cent of the denominations of
international trade contracts. The dollar is used far beyond
its value of buying things that are made in America. That means that
the dollar is going to be artificially high which
means if you make things in America and you
want dollars for them you’re going to have a
hard time selling abroad. This is true all over the world. It’s not just true in China. And particularly for the last
five years or so the Fed, until very recently,
was in a hiking cycle. It was making it more
attractive to move your capital to the
United States and invest. The European Central Bank
and the Bank of Japan were doing the exact opposite. There we’re sort of discouraging
the value of assets. They were driving down
the value of assets, which again discourages people
from buying those currencies. So if you want to do something
about the value of the dollar, and it’s not just Donald
Trump who wants to do this. Elizabeth Warren,
running for president, a Democratic senator, has
said as an explicit part of her campaign
plan that she wants to make sure that
the dollar drops in values against
other currencies to encourage American
manufacturing. So what you have to do is
convince the Fed that it’s got to drop way below what’s
indicated it’s preparing to drop, and then you have to
get a bunch of other central banks – over which you don’t
even have jawboning control, you don’t even have any
modicum of political control – to do you a favour basically,
and raise rates on their own economy to encourage investment
from abroad in their economy. That all feels unlikely. And so right now, all the Trump
administration really can do is jawbone. All it can do is say:
we think that the dollar should be less value. They can say: we’re
considering changing the 20-year-old
strong dollar policy. Now, they haven’t
explicitly said they’re changing the 20-year-old
strong dollar policy the United States, but they’re
definitely acting like they’re reconsidering it. Again, this isn’t a
unilateral decision. The Democrats were thinking
about this as well. Chuck Schumer urged
the White House to declare China a
currency manipulator. So all this leads us back
to the original question. Why declare China a
currency manipulator now? Well, the answer is they
needed to do something, and right now it’s the
only thing they can do.