One of the rare areas of agreement between presidential candidates Hillary Clinton and Donald Trump is that the U.S. must fight back hard against China’s manipulation of its currency.
But it is likely to be a much more awkward issue for Clinton in the fall, because the Obama administration’s position is that China doesn’t manipulate its currency. The Democratic front-runner will have to distance herself from Obama and the establishment Democratic position on the issue even though she served as secretary of state.
The issue has been on the front-burner throughout the race. Trump, unsurprisingly, has been the most bombastic on the subject.
“We can’t continue to allow China to rape our country,” the presumptive Republican nominee told a crowd in Fort Wayne just before Indiana’s May 3 primary elections. “That’s what they’re doing. It’s the greatest theft in the history of the world.”
Trump is fairly obsessed with the issue. He has cited it as a reason to oppose the Trans-Pacific Partnership, a proposed trade deal involving 12 Pacific Rim nations the administration has negotiated, even though China is not part of the deal. The U.S. cannot open up trade with countries in the region as long as China manipulates its currency, he argues.
Clinton’s rhetoric doesn’t go quite so far, but her bottom-line assessment of the situation is little different from Trump’s. In an op-ed she wrote for the Portland Press-Herald just before Maine’s March primary, she denounced China’s currency policy.
“China, Japan and other Asian economies [have] kept their goods artificially cheap for years by holding down the value of their currencies. I have fought these unfair practices before, and I will do it again,” she said.
The issue cuts across traditional partisan lines. Organized labor hates it. Business groups in general favor open trade policies, but aren’t unified on the currency issue. Exporters are generally hurt by a weak yuan, while importers benefit from it.
But many economists agree with the Obama administration that China is not actually manipulating its currency.
In late April, the Treasury Department released a report on whether U.S. trading partners, including Beijing, engage in “persistent one-sided intervention in the foreign exchange market.” It found that no trading partner did this, though it put China on a “watch list” with four other countries: Japan, Korea, Taiwan and Germany.
The Treasury Department report defined manipulation as “repeated net purchases of foreign currency that amount to more than 2 percent of its GDP over the year.” Not only did China not do that, the report found, but it said that the Asian nation intervened heavily to increase the yuan’s value. That was, however, after strong downward pressure “triggered by a surprise change in China’s foreign exchange policy last August” — an action that many viewed as a devaluation.
The announcement angered the administration’s congressional allies, particularly because the report was required by the Trade Enforcement and Trade Facilitation Act, legislation Obama signed in February that was touted by the administration as providing “new, unprecedented tools to address unfair currency practices.”
Sen. Bob Casey, D-Pa., told the Washington Examiner that the report does not capture the scope or systemic nature of Chinese currency manipulation.
“While China has recently altered their currency practices in response to a sluggish economy, this isn’t a time to give them a pass. We know that China has been a serial cheater on its currency for many decades,” Casey said.
Though Republicans are historically more inclined to back free-trade programs, the currency issue is where many draw the line.
“Given that the Obama administration fought currency reforms in Trade Promotion Authority, I’m not surprised the administration continues to look the other way on currency manipulation. It’s the easier path than taking a hard look at patterns of manipulation from China and others,” said Sen. Chuck Grassley, R-Iowa.
Robert E. Scott, director of trade and manufacturing policy research for the liberal Economic Policy Institute, said the Treasury report was essentially correct. While there is no question that China’s currency is undervalued, he says, it is no longer because the government is actively manipulating it. Instead, private capital is creating the downward pressure on the yuan, a consequence of China opening up its economy.
“I do think that China knew that when it opened up its economy that this would happen,” Scott added.
The problem, said Stuart Malawer, a law and international trade professor at George Mason University, is that economists have no widely accepted definition for currency manipulation. Any number of things can trigger a devaluation, and they’re not necessarily nefarious.
That creates a problem in terms of what the U.S. response should be. How do you fight back if China is technically trying raise the yuan’s value, not lower it?
Scott suggests what is called a “countervailing currency intervention” — that is, the U.S. manipulating the Chinese currency’s value by buying it up. That would require the U.S. borrowing more to purchase the currency — and the main buyer of U.S. bonds is China.
Scenarios like that help explain why picking a fight with China on the issue is a briar patch that presidents in both parties have been reluctant to jump into.
“To their credit, both the Obama and Bush administrations have been very hesitant to bend towards China’s critics,” Malawer said.
As secretary of state under Obama, Clinton would have had little influence on the issue, Malawer says, because currency is the Treasury Department’s issue, not the State Department’s.
It sets the stage for an interesting fight in the fall if the issue stays on the front-burner. The candidates will agree with each other, but Clinton will be the one saddled with explaining why Obama’s position is wrong and as a foreign policy Cabinet member she still couldn’t do anything about it.
