Late on Monday, the Trump administration turned its trade war with China up to 11, by officially labeling the country a "currency manipulator."
It was an obvious reaction to a sudden fall in the value of China's currency, which will help keep Chinese exports cheaper and help neutralize the pain of President Trump's tariffs. But it also raises a tension: By all accounts, the renminbi dropped because China stopped intervening in the foreign exchange market. The whole idea of "currency manipulation" tends to shift depending on who's doing the accusing and what their frame of reference is.
All of which is to say: Whether or not China is a "currency manipulator" requires a lot of unpacking.
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When the debate over China's "currency manipulator" status first heated up after a series of campaign promises by Trump, Council on Foreign Relations senior fellow Brad Setser explained that there are at least two definitions of currency manipulation the new president could draw on.
The first comes from the 1988 Omnibus Trade and Competitiveness Act, and it's pretty broad: The Treasury Department can label another country a currency manipulator based on whether their currency policies are "preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade." The Act also doesn't name any precise remedies — it's essentially a symbolic provision, whereby slapping the label on a trading partner confers political legitimacy for further moves down the line. (In Trump's case, most likely even more tariffs.)
The second approach is more recent, via the 2015 Trade Facilitation and Trade Enforcement Act. To define currency manipulation, the 2015 act demands specific numerical criteria regarding a foreign government's policies towards its bilateral trade balance, its current account, and the foreign exchange markets. It also lists specific retaliations, such as trade penalties or an appeal to the International Monetary Fund (IMF) to arbitrate the dispute.
In this case, Trump's Treasury Department explicitly cited the 1988 Omnibus Trade and Competitiveness Act, likely because China's behavior doesn't meet the Trade Facilitation and Trade Enforcement Act's more specific definitions. Among experts and economists who keep an eye on foreign exchange markets, there's widespread agreement that China's actions haven't fit the more precise definition since roughly 2013. As Setser pointed out, China currently meets only one of the three 2015 criteria, and the IMF recently gave China its stamp of approval.
To push up the value of the U.S. dollar relative to the renminbi, China buys financial assets denominated in U.S. dollars. Conversely, selling off its dollar-denominated assets lowers the value of U.S. currency relative to the renminbi. And while China's reserves of dollar assets remain enormous — a bit over $3 trillion as of June — they've actually been shrinking in recent years. On the face of it, that selloff has been pushing the renminbi up relative to the dollar; the downward pressure has come from other forces out in the foreign exchange markets. The value of the renminbi dropped this week because China, fed up with Trump's trade war, basically threw up its hands and stopped trying to resist the downward pressure.
In short, present circumstances rule out accusing China of currency manipulation in a precise technocratic sense. The most the Trump administration can justify is saying the broader results of Chinese currency policy and trade flows are damaging and unfair to U.S. interests.
This gets at a deeper problem, which is that to accuse a country of currency manipulation, you have to answer the question "Compared to what?" The going assumption in mainstream economics is that trade flows between countries should be free from government intervention, and governed by "natural" market forces. The trouble is that this whole distinction between the market and government policy breaks down on close inspection.
For instance, even if China isn't adding to its dollar reserves, their sheer scale is enough to put ongoing downward pressure on the renminbi relative to the U.S. dollar. But since holding dollar reserves is considered "normal" policy for national governments to engage in, no one thinks of it as currency manipulation.
For another example, Norway pumps the returns from its massive oil reserves into a sovereign wealth fund. But it does that because what international markets "naturally" want is just more and more oil, in which case Norway's expanding domestic oil industry would warp and overrun the rest of its national economy, by driving up the value of Norway's currency. The sovereign wealth fund is a government intervention in the foreign exchange markets — "currency manipulation," if you will — that protects the rest of Norway's economy.
Even more fundamentally, a big part of why the U.S. dollar is stronger than a lot of other national currencies is that the U.S. economy is stronger than a lot of other national economies. That makes America a much needed source of demand for the rest of the world's exports, and it makes U.S. financial assets unusually attractive to foreign investors. In that sense, domestic macroeconomic policy is also inevitably a form of currency and foreign exchange policy as well.
From a certain angle, everything is currency manipulation, and thus nothing is. Trump's objections to China are less that they are manipulating their currency, and more that they are manipulating it in a direction Trump does not approve of. At the same time, the mainstream effort to distinguish "market driven" currency movements from movements dictated by government policy is hopelessly subjective and artificial. There is no "natural" market baseline for foreign exchange rates against which Trump's accusation of manipulation could be judged inaccurate.
Perhaps a better question to ask then, rather than attempting to enforce some utopian market state, is how we can best pursue our interests as we understand them as a democratic society: What do we want to achieve with our currency policy, what should we be asking of other countries, and what deals and arrangements can we strike to facilitate that?
To that end, the strategy and tools Trump prefers may be a mess. But he has at least re-opened the argument that foreign exchange rates and balances of trade flows are perfectly legitimate objects of government concern.
