For years, Donald Trump has been fixated on taking China to task for manipulating its currency in order to give its goods an edge over competitors in global markets. He complained about it back in 2013 when he was a private citizen, and on the campaign trail he constantly vowed that he would put an end to it.
"On day one of a Trump administration, the US Treasury Department will designate China a currency manipulator," he wrote in a Wall Street Journal op-ed in 2015. In his Contract With the American Voter describing his plan for his first 100 days in office, he pledged: "I will direct the Secretary of the Treasury to label China a currency manipulator."
Well, it ain’t happening. In an interview with the Wall Street Journal published Wednesday, President Trump said that he wasn’t in fact going to deem China a currency manipulator.
“They’re not currency manipulators,” he said, explaining that the Treasury Department won’t be blacklisting China in a hotly anticipated Treasury report that comes out this week.
What caused him to change his mind? According to the Journal, there are two main reasons: Trump said he believes China hasn’t been manipulating its currency for months, and he’s worried that labeling it as such would interfere with his ability to cooperate with Beijing on the threat posed by an increasingly belligerent North Korea.
It’s difficult to overstate how big of a policy reversal this is for Trump — and how much relief it will bring to economic observers across the world.
If the administration had labeled China a currency manipulator, it would have required the Treasury Department to open negotiations with Beijing to try to get it to change its currency and trade practices. If a satisfactory solution wasn’t reached, the US government would’ve had license to impose tariffs on China. That in turn could have been the opening salvo of a trade war between the countries.
So what about Trump’s rationale for his change of heart — is it right? Sort of. He’s correct in his observation that China is no longer suppressing the value of its currency (although that’s been going on for years, not months). As for whether this move will encourage China to cooperate with the US on North Korea, that’s a lot less certain. A fair number of experts will tell you that trying to connect two completely disparate policy issues isn’t an effective negotiation tactic.
China intervenes in its currency — but right now that’s a good thing
Beijing’s central bank actively tries to move the value of Chinese currency, the renminbi (also called the yuan), by buying or selling foreign currencies.
That’s in contrast to many advanced economies like the US, which have a floating exchange rate, where the price of the currency is largely determined by supply and demand for it relative to other currencies (although it can be influenced by other factors as well, like a country’s macroeconomic policies).
China spent decades suppressing the renminbi’s value to keep the country’s colossal export machine competitive. It bought up tons of foreign currency, mainly dollars, in order to keep its own currency lower, accumulating $4 trillion worth of foreign exchange reserves by 2014. (When you buy a ton of currency, its value appreciates, and your own currency depreciates relative to it.)
By keeping the renminbi’s value low, China ensured that its goods remained inexpensive in global markets — and made foreign imports into China more expensive.
But China’s growth is slowing, foreign investors are pulling out of the country, and now the pressure on the renminbi is going the other way. In the past two years, Beijing hasn't been suppressing its currency — it’s been intervening in order to prop up the currency. China’s foreign reserve has dropped from $4 trillion to $3 trillion in just the past two years as the country has sold off foreign currency to keep the renminbi from depreciating too swiftly.
In other words, China is actively making sure its currency isn’t dropping, which makes its products more expensive than they would be otherwise. It also makes US exports more affordable to Chinese consumers.
Trump is desperate for help on North Korea
As recently as February, Trump appeared to be under the illusion that China was suppressing its currency. But it seems he’s rather suddenly been brought up to date.
One factor that may have helped expedite that process is North Korea’s relentless ballistic missile testing and pugilistic rhetoric, which has much of the global community on edge. The Trump administration is deeply concerned with figuring out a way to get Pyongyang under control and to ultimately get it to give up its nuclear weapons.
Trump has decided that the best way to do that is with the assistance of China — North Korea’s economic lifeline and only major friend in the international arena. And China has in recent months signaled that it is willing to play ball — in February, the country announced it was cutting off coal imports from North Korea.
But China is reluctant to push Pyongyang too hard economically, because it fears that could lead to serious instability or even total regime collapse in North Korea. If that were to happen, it would almost certainly trigger a massive exodus of poor, starving North Koreans fleeing over the border into China. It also could lead the US to increase its military presence in the region while moving to secure North Korea’s nuclear weapons.
Trump’s pitch is that China should be more likely to work with the US on disarming Pyongyang if he decides to be kinder on trade than he once threatened. There’s certainly a logic to it, but negotiations in disparate policy domains don’t necessarily bleed into one another in that manner.
“Linking such distinct issues seldom works because each involves different actors and different interests in each system,” Evan Medeiros, head of Asia research at Eurasia Group and a former top China adviser to President Barack Obama, told the New York Times when discussing the idea of Trump linking trade and North Korea.
Sure, China doesn’t want a trade war, but it also doesn’t want to see the collapse of Pyongyang. Having one of those preferences met doesn’t negate the other.
Just as it was difficult for Trump to get Beijing to budge on the One China policy or extract any kind of economic concession during his first meeting with China’s president, he’s likely to run into more obstacles in cooperating on North Korea than he anticipated.