Trump spurns working Americans by abandoning efforts to realign U.S.-China exchange rate
President Donald Trump recently told the Wall Street Journal that his administration won’t label China a currency manipulator in a semi-annual U.S. Treasury report that is due this week. Crucially, he has also forwarded no alternative mechanism to deal with the misaligned U.S.-China exchange rate. This essentially means that Trump has turned his back on working Americans who have lost millions of manufacturing jobs since China entered the WTO in 2001, and have experienced growing competition with imports from China and other low wage countries that reduced the wages of all non-college graduates by $180 billion per year in 2011 alone.
In a campaign speech in Monessen, PA last June Trump outlined a 7-step program that he “would pursue right away to bring back our jobs.” In step five, he promised to “instruct my Treasury secretary to label China a currency manipulator,” a commitment he repeated many times last year.
There has been some debate over whether or not the Chinese is currently actively manipulating its currency. What there is no debate over is whether or not the U.S.-China exchange rate is severely misaligned, and that this misalignment costs jobs in U.S. manufacturing. While China has been a net seller of foreign exchange reserves over the past two years (meaning that it has not engaged in direct manipulation over this time), it maintains well in excess of $3 trillion in total reserves, which have a depressing effect on the value of its currency.
Other indicators highlight how misaligned the U.S.-China exchange rate is. For example, China reported a goods trade surplus of $544 billion in 2016, and its national savings rate is nearly 50 percent of GDP—far in excess of its domestic investment. As a result, China is generating large savings surpluses that are being exported to the rest of the world (but disproportionately to the United States), in a return of the global savings glut that fueled the housing and financial crises of the last decade. China’s currency remains massively undervalued after two decades of currency manipulation, subsidies, dumping and other unfair trade practices, including the widespread influence of state-owned enterprises in the Chinese economy. Recent years have seen private capital outflows from China to the United States on a large scale, further pushing up the value of the dollar. Some of these private outflows may in fact be driven in large part by intentional government policy (including relaxation of capital controls by China).
Trump made campaign promises to get tough with China on key trade issues, such as China’s excess capacity and production in aluminum and steel and industrial espionage, and to hold firm on the U.S. position that China is a non-market economy. He should make good on these promises. But these steps alone will not be sufficient to rebalance trade with China, or other major surplus countries, including Japan, Korea, and the European Union. The time has come for a major currency realignment that would substantially increase the trade-weighted exchange rates of all the major surplus countries. Raising the value of the currencies of our major trading partners, as we last did under the 1985 Plaza Accord, is the single most effective tool for rebalancing trade.
Recent research has indicated that the Chinese yuan must rise in value by at least 30 percent to 40 percent against the dollar (along with the currencies of other major surplus countries) in order to bring global trade back into balance (but less than 10 percent on a trade-weighted basis). The best way to do that is for Congress and the president to work together on legislation that could persuade China and other surplus countries to seek a currency deal with the United States.
Using the semi-annual Treasury report to identify past instances of Chinese manipulation and current dangerous U.S.-China currency misalignments would be a good start to this. Further, other countries surely are engaged in currency manipulation and should be identified in the report. For Trump to casually walk away from the most useful tool to begin the process of realigning the U.S. dollar to allow American manufacturers to compete on a level playing field is a stunning rejection of working Americans and communities who rely on the jobs provided by a strong manufacturing sector.