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Trump’s Currency Confusion Continues

Summary:
Ever since the 2016 US presidential campaign, Donald Trump has falsely accused the Chinese of keeping the renminbi artificially weak. But the fact is that Trump's own economic policies are driving up the value of dollar – an outcome that would have been foreseen by anyone with a basic understanding of economics. CAMBRIDGE – Next month, the US Department of the Treasury is due to submit to Congress its biannual report detailing which countries, if any, are manipulating their currencies to gain an unfair trade advantage. For his part, President Donald Trump is already accusing China of doing so, as he did throughout the 2016 election campaign. And he is reportedly trying to influence the Treasury Department’s deliberations. Joe

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Ever since the 2016 US presidential campaign, Donald Trump has falsely accused the Chinese of keeping the renminbi artificially weak. But the fact is that Trump's own economic policies are driving up the value of dollar – an outcome that would have been foreseen by anyone with a basic understanding of economics.

CAMBRIDGE – Next month, the US Department of the Treasury is due to submit to Congress its biannual report detailing which countries, if any, are manipulating their currencies to gain an unfair trade advantage. For his part, President Donald Trump is already accusing China of doing so, as he did throughout the 2016 election campaign. And he is reportedly trying to influence the Treasury Department’s deliberations.

What has changed since the last report in April? That document, like similar reports written during the previous two administrations, did not find China guilty of manipulation. In fact, the last time the Treasury Department declared China (or anyone else) a manipulator was in 1994.

The reason for this is simple: China does not meet the three criteria that Congress has set for determining currency manipulation. It has not been persistently intervening in foreign-exchange markets (at least not to push down its currency), and it is not running an overall current-account surplus greater than or equal to 3% of GDP (its surplus in 2017 was 1.3%).

China does meet the third criterion: a bilateral trade surplus with the US in excess of $20 billion. But Congress was wrong to set the bilateral balance as a criterion in the first place. The huge US trade deficit worldwide is sufficient to explain the bilateral deficit. China accounts for 15% of the world economy, so even its proportionate share of the US’s $600 billion deficit would be $90 billion – well over the $20 billion threshold. Yes, the bilateral deficit is much higher than even that level; but that is partly because China’s exports to the US contain so many imported inputs.

So, as of April, China had met just one of the three congressional criteria, and thus did not qualify as a currency manipulator. (Germany, India, Japan, South Korea, and Switzerland each met two criteria.) Since then, the renminbi has depreciated by 6% against the dollar. But that is because the dollar itself has appreciated by 7% on a broad average basis against its trading partners’ currencies.

Exchange rates do not always accord with economists’ models. But in this case, the dollar’s appreciation can be explained by Trump’s own economic policies.

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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