“I mean, look, we’re being hurt very badly by China with devaluation.”
— President-elect Donald Trump, interview on “Fox News Sunday,” Dec. 11, 2016
“China and others, they just knock the hell out of the value of their currency, and we have to go back and back. And it just doesn’t work, folks.”
— Trump, speech in Baton Rouge, La., Dec. 9, 2016
On the campaign trail, Trump repeatedly claimed that China was devaluating the yuan — and we pointed out the inaccuracies of his trade rhetoric. Yet as president-elect, Trump continues to utter this claim, including during his “thank-you tour” speeches.
A lot will change on Jan. 20, 2017. Trump not only will take office as president of the United States, but he also will be confronted with the reality of actually governing the country — and all the facts that do not comport with campaign or pre-inauguration rhetoric.
Trump has promised that on Jan. 20, he will direct the treasury secretary to label China a currency manipulator. And on that day, Trump also will find some facts standing in his way: China does not meet the definition of a currency manipulator under current U.S. laws, and China hasn’t devalued its currency for about two years. (Check out our new Trump Promise Tracker.)
Once again, let’s review the facts. Trump’s staff, as usual, did not respond to our requests for comment.
From the 1990s into the 2000s, China artificially kept the value of the yuan, or renminbi, low. It kept the Chinese currency cheaper, undervalued and more competitive compared with the overvalued and less competitive U.S. dollar. This currency devaluation distorted China’s economy and made it seem stronger than it really was. China’s currency devaluation led to tensions among world leaders for many years.
In the early 2000s, China let the yuan appreciate, but not as much as it would have grown without any government intervention. From 2003 through 2014, China bought more than $300 billion annually to keep the value of the yuan down, according to Fred Bergsten, senior fellow and founding director of the Peterson Institute for International Economics.
However, the situation has changed dramatically over the past two years, Bergsten said. China’s economic growth has slowed down, and the yuan is depreciating. There’s more anxiety about the future of the Chinese economy, and the Chinese are sending private capital out of the country to find safer investments in other countries, Bergsten said.
So, instead of holding the value of its currency down, China is now selling dollars to prevent the yuan from weakening more than it has. From August 2015 through August 2016, China has sold more than $570 billion in foreign currency to prevent more rapid depreciation of its currency, according to estimates by the Treasury Department.
“They’re actually doing the reverse of what he [Trump] says, helping our competitiveness by keeping their currency from weakening much further,” Bergsten said.
Can the United States declare China a currency manipulator anyway? Not under current laws.
Under the Omnibus Trade and Competitiveness Act of 1988, the Treasury Department determines whether countries are manipulating exchange rates against the U.S. dollar “for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” There is no basis to label China a currency manipulator under this law, said Mark Williams, chief Asia economist at Capital Economics, an independent economic research company.
“If the Treasury concludes that a country is manipulating its currency, the only immediate consequence is that it has to talk to that country about its exchange-rate policies. The U.S. already does this on a regular basis anyway,” Williams said.
There’s also the Trade Facilitation and Trade Enforcement Act of 2015. It does not mention the word “manipulation” but tasks the Treasury with determining whether a trading partner’s currency policy deserves close attention, Williams said. There are three criteria under this law: having a large trade surplus with the United States, having a material current surplus, and engaging in persistent one-sided intervention in the foreign exchange market.
In October 2016, the Treasury Department found that no economy fit all three criteria. China only met one criteria: the trade surplus. And China is actually intervening to prevent its own currency from depreciating, not to gain competitive advantage over the United States.
What happens if the Trump administration changes the criteria and labels China a currency manipulator?
“That would trigger a formal process in which the U.S. government could limit Chinese investment in the United States or introduce tariffs and trade barriers against China,” wrote our Wonkblog colleague Ana Swanson. “Such a move — accurate or not — could provoke retaliation from Beijing that could hurt U.S. companies and workers.”
China could retaliate with its own tariffs. But before it gets to that point, Williams said: “I think we’d see life getting very difficult for U.S. firms doing business in China or trying to sell to China. Regulatory inspections. Compliance checks. Competition probes.”
The Pinocchio Test
With Jan. 20 quickly approaching, we suggest Trump check his calendar: His rhetoric is way out of date. Trump continues to claim that the United States is being “hurt very badly by China with devaluation.” Not only is the United States not being hurt by China’s current currency manipulation, China is not devaluing its currency anymore. In fact, China is selling foreign currency to prop up its own, in an effort to prevent the yuan from depreciating further and destabilizing the Chinese and global economy.
Trump has promised, on his first day as president, to direct the treasury secretary to label China a currency manipulator. He can direct his treasury secretary all he wants, but the actual job will take more time to accomplish. Under current U.S. laws, China does not qualify as a currency manipulator. The Trump administration can come up with new criteria — perhaps ones that don’t relate to China’s intervention in the foreign exchange markets — but it may end up backfiring on U.S. workers and companies instead.
We are curious to see whether Trump goes through with this campaign promise, the facts notwithstanding. In the meantime, we award him Four more Pinocchios for this claim.
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