Times Have Changed Since US Last Named China a Currency Manipulator

21-Jan-2017 Intellasia | Bloomberg | 6:00 AM Print This Post

As President-elect Donald Trump considers his options to take on China over trade, he can’t dangle the same carrot a predecessor had more than two decades ago, when the US last officially dubbed China a currency manipulator.

President Bill Clinton’s administration in 1994 tied Chinese cooperation on exchange-rate policy to negotiations for World Trade Organisation entry. In fact, it wasn’t even called the WTO yet, but the general Agreement on Tariffs and Trade. China took measures that eased US concerns, shaking the manipulator tag, even though it took years to enter the world’s main trade body, which happened in 2001.

Today, it’s a very different story. America no longer holds such keys, and it’s Chinese President Xi Jinping who’s advocating for free trade and globalisation in contrast to Trump’s protectionism. As for the stick, Trump may have less up his sleeve than Clinton did, as China’s rapid development and diversification of its economy since then have reduced the relative importance of its bilateral trade ties with the US

“Trump has far less leverage,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. Among the difficulties: the US is unlikely to find support from its regional allies on unilateral protectionism, and the interests of some American companies themselves would be in conflict with such an aggressively anti-China approach, Xia said.

Treasury Secretary nominee Steven Mnuchin said during his Senate confirmation hearing Thursday that he was willing to label China as a currency manipulator, if warranted.

The biggest losers from an all-out US-China trade war could be those with more favourable diplomatic ties to the US – - the free-market economies of Japan, South Korea and Taiwan. Those economies are intertwined with China through manufacturing supply chains and lack the internal growth drivers enjoyed by its bigger neighbour – - continuing urbanisation and expanding ranks of middle-class consumers.

It was all quite different in the early 1990s. The US labeled China as a currency manipulator between 1992 and 1994, complaining it limited access for its companies to buy products from the US and deliberately weakened the yuan.

Lawrence Summers, then-Treasury undersecretary for international affairs, who later became Treasury chief to Clinton and a top adviser to President Barack Obama, said at the time that besides bilateral talks, the US had a powerful bargaining chip: “The remaining tool is the, I think, quite significant leverage that is afforded by the ongoing GATT negotiation, which is something that China very much wants.”

The tag was dropped at the end of 1994 following Chinese reforms of its exchange rate. However, the tensions didn’t disappear, with the Clinton Treasury continuing criticisms.

Robert Lighthiser, whom Trump has picked to head the US Trade Representative office, argued in 2010 that the US should be willing to depart from WTO rules and take tough action against China.

Currency Manipulator?

Trump, in an interview with the Wall Street Journal last week, pointed to bilateral talks to address his concerns that China’s currency is excessively weak. He said that while Chinese policy makers are certainly manipulators, he wouldn’t designate them as such on his first day in the White House, the Journal reported.

Yet if any manipulation is taking place in China right now, it’s to prop up, not weaken the currency. The yuan fell 6.5 percent last year against the US dollar as capital flowed out, Chinese firms went on a global shopping spree and its savers looked to diversify their wealth in everything from apartments in Sydney to Hong Kong life insurance products. The People’s Bank of China spent billions of dollars trying to cushion the yuan’s slide.

And that’s maybe where Trump does have some leverage. If Chinese exports to the US dried up, China would see its trade surplus turn into a deficit and the yuan would be “smashed,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

“History shows in clashes between trade surplus and deficit countries it’s the exporter who loses, not the importer,” Every said. “That’s why China is publicly talking up a defense of the current global trading system: it’s a game it keeps winning, and it doesn’t want to rules to change.”



Category: China

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