Why the US labelled China a currency manipulator
The FT's US economics editor Brendan Greeley asks why the US administration decided to label China a currency manipulator and how this affects the trade war between Beijing and Washington
Filmed by Donell Newkirk, edited by Ben Marino
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BRENDAN GREELEY: 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 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% of global trade, but the dollar itself is used, it says, about 60% of central bank reserves. It's a comparable percentage. We think about 50% to 60% of the denominations of international trade contracts.
The dollar is used far beyond its value of buying things that are made in America. And 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 are 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.