China As A Currency Manipulator: What Does It Mean?

As Connecting the Dots noted briefly last week, President Donald Trump took the rare step on Monday, August 5 of formally labeling China a currency manipulator. Weighing in on the news last week, most media outlets and economic and political analysts called the move “largely symbolic” since the Trump administration already is engaged in trade negotiations with the Chinese government and already has signaled its willingness to impose higher tariffs on the Chinese products.

Practically, then, the designation means just a few things. First, according to Politico, under a proposal the Trump administration issued in May it clears the way for the U.S. Department of Commerce to start referencing China’s undervalued currency as a government subsidy when imposing countervailing duties.

Second, if, after one year, the president and the U.S. Treasury secretary determine China has not addressed the U.S.’s concerns the president could:

• Prohibit the U.S. Overseas Private Investment Corporation from approving any new financing in China;
• Keep the U.S. government from procuring any goods or services from China;
• Instruct the U.S. executive director at the International Monetary Fund (IMF) to call for additional rigorous surveillance and formal consultations on this issue; and
• Tell the Office of the United States Trade Representative (USTR) to take currency actions into account in determining whether to enter any bilateral or regional trade agreement with China.

The designation also allows the United States to immediately engage in negotiations with the IMF to adjust China’s rate of exchange. The U.S. Department of the Treasury said last week that those discussions are imminent. It appears, however, that it might be difficult for Treasury officials to convince the IMF of the merits of the United States arguments.

According to Politico, in its annual review of China’s economic policies that was released last week – but that was complete before the Trump White House’s China currency decision – the IMF said the Chinese government already has taken steps over the last year to raise the value of its currency. Indeed, the IMF said the yuan “was broadly stable.” Politico concluded the report “provided little or no support for President Donald Trump’s assertion that China is manipulating its currency for an unfair trade advantage.”

In its report, the IMF did warn that China’s “exchange rate should remain flexible and market-determined to help absorb the tariff shock.”

President Trump’s decision last week also will impact negotiations with China moving forward. Top economic officials from the United States and China have been expected to meet again in September to continue trade talks. At the end of last week, however, President Trump said, “We’ll see whether or not we keep our meeting in September.”

In related news, over the last two weeks, the Office of the USTR announced two rounds of product exclusions. On July 31, USTR announced a first batch of product exclusions granted for products under List 2 ($16 billion in Chinese imports), covering 69 specific product descriptions andon August 2, USTR announced a first batch of product exclusions granted for products under List 3 ($200 billion in Chinese imports), covering 10 specific product descriptions.