U.S. Treasury (Finally) Assails China as a Currency Manipulator: Why They Did it and What it Means

“If money is the root of all evil, then China’s manipulation of its currency, the yuan, is the tap root of everything wrong with the U.S.-China trade relationship.” — Peter Navarro, White House Trade Advisor  


While Peter Navarro (like most people) neglected to mention that the love of money — not money itself — is apparently the root of all evil, with this bold statement he joined a long, long list of economic strategists who have long since held that China’s manipulation of the yuan is so blatant and explicit, that it would make Machiavelli blush. And now, the U.S. Treasury has formally endorsed this view by labeling China a “currency manipulator” — the first such designation by the U.S. since 1992-1994.


What is Currency Manipulation?


Currencies fluctuate in relative value based natural forces of international trade and currency flows. However, when governments stick their hand on the scales to weaken the value of their nation’s currency, other countries justifiably cry foul because it leads to an unfair advantage for exporters.


For those who can’t recall their high school macroeconomics (or don’t wish to relive those traumatic times), here’s how this plays out in in very simple terms: China exports about $18 billion a year in aircraft to the U.S. American companies who procure aircraft from China need to convert USD into Yuan. When the Chinese government artificially weakens the value of the Yuan relative to the USD, these American companies effectively get more Yuan for their USD, which means their bottom-line cost is lower. The end result? Chinese producers win, and producers in other countries — including the U.S. — lose. 


Not a Partisan Move


Despite the fact that just about everything that comes out of Washington D.C. these days seems partisan — from an office renovation in the West Wing to the color of Pelosi’s jacket — the decision to label China a currency manipulator is something that politicians on both sides of the aisle have been calling for. In fact, Chuck Schumer has been calling on Trump to lower the boom on China (label-wise, that is) since late 2016.  


What Happens Now


It’s unclear what designating China as a currency manipulator will mean to the fractious trade talks between the U.S. and China. It could be the first step towards a formal complaint to the International Monetary Fund (IMF). If nothing else, Navarro, Lighthizer and co. hope that it sends a clear, unmistakable signal to Beijing that currency manipulation strikes at the heart of international trade — and unlike the past, this White House administration has the political will to finally do something about it.  




Disclaimer: This content does not necessarily represent the views of IWB.


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