Currency manipulation is an important issue and has been recognized as such by the international community. When a country intervenes in the foreign-exchange market to depress its currency so as to promote exports and discourage imports, something equivalent to imposing tariffs on imports and providing subsidies to exports is happening. This is especially of concern when, as in the case of countries previously deemed manipulators, a country is running a substantial trade surplus.
China does not come close to fitting this template. Over the past eight years, it has reduced its trade surplus from more than 8 percent of GDP to essentially zero in response to U.S. pressure. Its interventions in currency markets over the past several years have been to prop up its currency rather than to drive it down. And the move down in the yuan on Monday was not artificial — it was an entirely natural market response to newly imposed U.S. tariffs. Without some mercantile advantage, and with ongoing efforts to prop up the exchange rate and so raise export prices and reduce import prices, there is no credible manipulation claim here.
By labeling as Chinese currency manipulation an exchange-rate move that was obviously a natural response to his boss’s policies, the secretary has damaged his credibility and that of his office. It will be harder now in the next difficult financial moment for Treasury Department pronouncements to be credited by market participants. Having seen the United States label China a manipulator, the world will wonder whether and how the United States will get China to change its exchange-rate policies. If Chinese policies do not change, we will have only demonstrated our impotence to China and the world. Why is that desirable?
Further, the president’s flailing bluster, in which the treasury secretary is now a full participant, risks real economic damage as businesses and consumers become fearful and hold off on spending. There is a growing concern that exchange-market developments will be an excuse for yet more tariffs against China, or for the United States to start buying up Chinese currency. Markets in recent days have reacted in ways suggesting high alarm, with investors flooding into safe-haven assets such as bonds, gold and even bitcoin and flooding out of riskier assets such as stocks and loans to businesses. The risk of recession going forward might now be as high as any time since the 2008 financial crisis.
There is a final problem with the Treasury Department’s manipulation claims. The United States has an enormous agenda with China — North Korea, Taiwan, Hong Kong, aggressiveness in the Pacific region, unfair trade practices and much more. We have only limited capacity to shape Chinese behavior. Should we not focus on areas where our position is clearly right and the stakes are high rather than areas where our claims are dubious and prosecuting them damages our economy?