Labeling China as a currency manipulator marks a political milestone for President Trump, but it will have little direct impact on the Asian country’s trade battle with the U.S., the only economy larger than its own.
Not least because the White House is already using most of the remedies the move allows.
During the past 18 months, the Trump administration imposed 25% tariffs on $250 billion of Chinese goods and promised duties on the remainder, decisions that have rattled financial markets and prompted pushback from businesses. Beijing has not only responded in kind, but cut off purchases of U.S. crops — many grown in states that supported Trump in 2016 — and allowed the value of its yuan to sink.
It was the currency’s drop in early August to a level not seen in 11 years that prompted the Treasury Department to apply the manipulator designation, which empowers the U.S. to work with the International Monetary Fund to eliminate China’s unfair advantage if the organization concurs that one exists. Then, after a yearlong negotiation, the U.S. would be able to block Chinese companies from new government contracts and order the U.S. trade representative to counter the manipulation.
The rub is that the U.S. already limits the amount of business that government contractors do with China, and the International Monetary Fund is unlikely to agree that China is manipulating its currency, given that it recently determined the yuan was valued appropriately, according to economists at Bank of America. Trade Representative Robert Lighthizer, meanwhile, has been working for more than a year to negotiate an agreement with China.
Obtaining any direct results from the designation is a “very cumbersome and lengthy process,” said Chris Krueger, an analyst with Cowen Washington Research Group, which has tracked federal policy for the past four decades. “Basically, the juice is not worth the squeeze.”
Treasury’s action “is probably meant to prevent China from allowing the yuan to depreciate too much,” said Michelle Meyer, a Bank of America economist. A less valuable yuan makes Chinese goods cheaper and more appealing in international markets, potentially placing U.S. businesses at a disadvantage. As of Aug. 5, each American dollar was worth 7 yuan — a level not seen since the buildup to the 2008 financial crisis.
“Since President Trump has repeatedly expressed his concerns on dollar strength and the U.S. doesn’t have a good set of tools for currency intervention, there could be an important element of caution against a weaker yuan, together with other emerging-market currencies, at work here,” Meyer said.
“The most important takeaway” from the designation, said Tao Wang, an economist with the Swiss lender UBS, “is the risk of the U.S.-China trade war escalating further has increased.”
Indeed, the weakening of the yuan on Aug. 5 led to the Dow Jones Industrial Average’s biggest drop of 2019, up to that point, as concern mounted. Economists have cautioned that tariffs on all remaining Chinese imports would cover a wide swath of consumer goods unaffected by earlier measures, gouging voter pocketbooks and hurting a sector that comprises two-thirds of the U.S. economy.
At the same time, a gauge of recession risk widely followed by traders and investors — the difference between yields on 3-month and 10-year Treasuries — has sent ominous signals during the spring and summer.
Typically, investors demand higher yields on long-term notes because conditions in the distant future are more difficult to predict; when that pattern reverses, as it has this year, creating what’s known as an inverted yield curve, investors believe the immediate risk of a downturn is higher.
The president and his administration, however, have brushed aside such concerns. Larry Kudlow, the director of the National Economic Council, emphasized job growth and a low unemployment rate to reporters after the early August market swoon.
“We’re in great shape economically, and frankly, the biggest loser is China,” he said. “This is a transformative president who is going in many places where prior presidents in both parties have feared to tread. He is determined. He is rebuilding the economy, which is going very strong, and I think part of that has to be trade. I’m certain he’s going to stay on track.”
Business leaders, who largely support efforts to rebalance U.S. trade with China, would nonetheless prefer he switch strategies. Escalating trade fights — including threatened levies on Indian and Vietnamese imports, cars and car parts, and French wines — represent a growing threat to the labor market, they say.
The tactic “will only inflict greater pain on American businesses, farmers, workers and consumers,” Myron Brilliant, head of International Affairs at the U.S. Chamber of Commerce, said after Trump announced the 10% duties.
BlackRock, the world’s largest money manager, predicted even before the most recent escalation that the trade war may drag U.S. economic growth to below 2%, less than half Trump’s oft-stated target of 4% or more. In the second quarter, growth sagged to 2.1%, compared with 3.1% in the first three months of the year.
For some U.S. manufacturers, the costs of U.S. trade policy have already exceeded the benefits of a GOP-led tax cut in late 2017 that lowered the top corporate rate to 21% from 35%.
At Boston-based General Electric alone, China tariffs were expected to cost as much as $500 million this year before the latest increase.
“The trade tensions there are real,” CEO Larry Culp told investors during an earnings call on July 31. “How that plays out for our book of business in China, how it plays out more broadly for all of us, is a bit unclear.”
