President Donald Trump said Friday that “China, the European Union and others have been manipulating their currencies and interest rates lower,” returning the spotlight to the issue.
Mr. Trump was alleging that these economies take policy measures to lower the value of their currencies relative to others to make their exports cheaper on world markets. The U.S., by contrast, allows the value of the dollar to be determined by global financial markets.
As a candidate, Mr. Trump repeatedly promised to designate China a currency manipulator—a label that would potentially open the country up to economic penalties. But his Treasury Department has three times declined to do so. The action would come in one of the Treasury’s semiannual foreign exchange reports; the next one is scheduled for October.
Treasury hasn’t labeled any nation a manipulator because none of them meets its three-part test. These are the three components:
1.) An economy must have a significant trade surplus with the U.S. of at least $20 billion. China and the European Union easily clear this hurdle. China’s is over $300 billion and the EU’s is over $100 billion (with Germany responsible for about $66 billion).
2.) The economy must have an overall current account surplus of at least 3% of its gross domestic product. In other words, the country must have a large trade surplus not just with the U.S., but with the entire world, too. The EU and Germany easily meet this threshold. In April, the EU had a current account surplus of 3.5% of GDP. For Germany, the figure was 8.1%.
But China’s current account surplus has been shrinking. Despite running a massive surplus with the U.S., its total global surplus was just 1.4% in the twelve months through April, according to Treasury’s measure. China increasingly imports from the rest of the world, and it has a large deficit when it comes to tourism — a report from Nielsen estimates Chinese tourists took 131 million trips to other countries, mostly elsewhere in Asia. So China doesn’t meet this threshold.
3.) To be a manipulator, an economy must conduct “persistent, one-sided intervention” in the currency market. On this score, neither the EU nor China comes close.
The European Central Bank, which sets monetary policy for most of the countries in the EU, does not intervene in foreign currency markets at all. Low interest rates have contributed to a weaker euro, of course, but monetary policies primarily aimed at boosting economic growth have not traditionally been considered manipulation.
China intervenes in foreign currency markets but over the past year it has not done so on a large scale and not in a single direction. Under the Treasury’s framework, if China buys a certain amount of its currency and sells the same amount, the two moves would cancel each other out. Over recent months, China’s moves have had little net impact. Though China has weakened its currency in the past month — some suspect as a strategy to offset tariffs — earlier in the year it had taken steps to let its currency strengthen.
“The data doesn’t make a strong case for a determination of manipulation” by China, said Brad Setser, senior fellow for international economics at the Council on Foreign Relations.
Simply put, neither China nor the EU meet all three of Treasury criteria.
Treasury could simply move its goal posts. Currency manipulation is covered by two U.S. laws in particular. The department’s report sticks to a framework from the 2015 Trade Facilitation and Trade Enforcement Act. But there’s an older law, the 1988 Omnibus Trade and Competitiveness Act, which has much more flexible definitions. By switching to definitions under the old law, the Trump administration could easily slap the label on China (it still might be tough for Europe, since the ECB doesn’t directly intervene in currency markets.)
If Treasury made that move, the question would then be: so what? The reason for designating a country a
currency manipulator is to justify some sort of retaliation. But the Trump administration has already shown both its ability and willingness to use other trade laws to impose sweeping penalties against China and Europe for policies the president says treat the U.S. unfairly.
This year the U.S. has imposed three significant rounds of tariffs on China—first on washing machines and solar panels, second on steel and aluminum, and third on about $34 billion of intermediate goods imported each year. The White House has said it would assess tariffs on a further $200 billion in Chinese goods and Mr. Trump has at times threatened to apply tariffs on all U.S. imports from China.
The administration also has placed tariffs on steel and aluminum from the EU, and is moving forward with a process that would allow tariffs on automobiles and auto parts — a huge part of EU-U.S. trade.
By the standards outlined by Mr. Trump’s Treasury Department, China and the EU aren’t currency manipulators. But that might be little comfort in Beijing and Brussels since they’re facing significant tariffs anyway.
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