President Trump is vilely angry that China is manipulating the yuan down in value. This is to undo everything he’s been striving for in the trade negotiations, and how dare they do such a thing? It’s also true that the yuan going own in value is the normal and obvious market response to the various trade tariffs being imposed upon Chinese exports. Blaming people for what ought to happen, blaming people for what would happen even if everyone did nothing, doesn’t seem that great a basis for international politics.
This leaves us with the only interesting question. Does the White House know all this, so the shouting is politics, or don’t they know this and we should be more worried?
China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!
— Donald J. Trump (@realDonaldTrump) August 5, 2019
It’s true the yuan has dropped through 7 to the dollar, long the level at which China would intervene to defend that exchange rate. But that’s about as far as the agreed facts go. After that, the president has things wrong.
Firstly, note that no one is stating, let alone insisting, that China is making the yuan drop in a bout of manipulation. Rather, they’re not stopping it from dropping, their more normal work is to do that stopping. They used to intervene to stop this, now they’re not doing that intervening. Think on the implications of that — China might have been manipulating the currency but they’ve been doing so upwards, not down. This is, by the way, generally agreed among economists and currency traders. The yuan is stronger than it should be, not weaker.
The initial complaint seems to be that China is now no longer manipulating the value of the currency. Not quite what we’re being told, but true all the same.
There is also this point that, well, what should happen to the yuan these days? The economists’ answer is that when the “terms of trade” change, then so should the value of the currency. Sticking whacking great tariffs on China’s exports to the United States might really be a tax upon Americans, but it’s also one of those changes in the terms of trade. The correct response out there is that the yuan should become weaker against the dollar. Which makes the claim of manipulation rather harder to uphold really. For in the absence of anyone doing anything, the yuan would get weaker. The yuan is getting weaker. So who is doing any manipulating of what?
What should be happening is therefore happening and this is leading to complaints. But actually, Trump should be overjoyed. Tariffs are taxes paid by Americans on the things Americans buy. The only way China can be paying any of them is if something else, something extra, then happens — like the yuan dropping.
This makes all imports into China more expensive for Chinese citizens. That’s China paying for Trump’s tariffs when the yuan falls. Without this happening, only Americans pay. With the yuan dropping, China pays as well. This is the claim Trump has been making all along, that China’s really paying those trade taxes — now they are.
Yes, this is a bit snarky. But our basic truth remains: Imposing significant export tariffs on a country should mean the value of that currency falls. This is what is happening. Why is Trump complaining about it?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
