Editorial: Yuan-Bashing Won’t Help Reduce U.S. Trade Deficit
Global trade and financial analysts are watching closely to see whether China will be labeled as a currency manipulator in the Semiannual Report on International Economic and Exchange Rate Policies, which is scheduled to be released by the U.S. Treasury Department on April 15.
Currency issues have rattled China-U.S. ties in recent months. U.S. President Donald Trump repeatedly slammed China’s currency policy during his presidential campaign. In late March, he again called China the “grand champion” of currency devaluation in an interview with the Financial Times. After Trump and Chinese President Xi Jinping wrapped up their first face-to-face meeting last week in Florida, the world is waiting with bated breath to see whether the two leaders have reached some consensus on currency issues.
As per U.S. government rules, a country must meet three criteria to be officially labeled as a currency manipulator: Its trade surplus with the U.S. must exceed $20 billion; its current account surplus must exceed 3% of gross domestic product (GDP), meaning national savings far exceed investments; and “persistent, one-sided interventions” are present in the currency market, including purchases of foreign currency in excess of 2% of GDP within a year, driving up other currencies and devaluing the domestic currency.
China meets only the first criterion, running a trade surplus with the U.S. to the tune of $347 billion in 2016, according to the U.S. Census Bureau. Since 2007, China’s current account surplus has gradually narrowed from 10% of GDP to 1.8% in 2016. And contrary to Trump’s rhetoric, China’s central bank has tried to push up the yuan’s exchange rate in the past year by selling its foreign exchange reserves to prevent the currency from slipping even further. In October, the final report on international economic and exchange rate policies issued by the Obama administration said, “China’s interventions in foreign exchange markets have sought to prevent a rapid yuan depreciation that would have negative consequences for the Chinese and global economies.” It is also interesting to note that the U.S. Treasury’s previous report in October said that Germany, Japan and even Switzerland satisfied two of the above criteria, although none of them has been targeted by the Trump administration.
Several former U.S. Treasury secretaries, including Lawrence Summers and Jack Lew, have pointed out that China currently doesn’t meet the criteria to be classified as a currency manipulator. However, the next move by the Trump administration is still uncertain, given the U.S. president’s yearlong rhetorical crusade against so-called Chinese foreign trade abuses. China should brace itself for possible challenges.
From 1992 to 1994, the U.S. Treasury Department accused China of currency manipulation five times, but it stopped short of imposing any trade sanctions. After the yuan started to gradually appreciate since the mid-1990s, it was never labeled a currency manipulator. The U.S. Treasury has only from time to time criticized China for containing the rise of the yuan.
Behind the currency spat is America’s growing desire to reduce its overall trade deficit, to which China was the biggest contributor. According to the U.S. Department of Commerce, China’s share of the U.S. deficit rose to 47% by 2016. However, a protectionist approach will not fix the trade imbalance between the two countries, and imposing punitive tariffs on Chinese imports claiming currency manipulation will only lead to an ugly trade war. It will hurt both sides, as well as the global economy.
The soaring Sino-U.S. trade imbalance can be attributed to differences in competitive advantage, with China emerging as the world’s factory in the past three decades, and differences in economic structure and the stage of development each country is in, rather than the yuan’s value. While China has a surplus in terms of trading goods with the U.S., there is a deficit in the services trade. Meanwhile, the ability of a declining yuan to push up China’s exports has been diminishing. Chinese authorities say they have no intention of devaluing the currency to boost exports. Instead, they have sought to fix the trade imbalance with the U.S. as it will benefit China in the long run.
Debating about currency manipulation won’t help foster bilateral trade relations. Both China and the U.S. should objectively analyze the underlying causes of the imbalance in trade, grasp its complexity and communicate and coordinate to fix problems through joint efforts.
China needs to continue pushing forward economic reforms at home to adjust its industrial structure and promote the development of its services sector. It should also lower trade barriers, particularly for services such as education, health, travel and others. By stepping up the speed of changes at home, China can boost internal consumption and demand for imported goods and services, while reducing its reliance on exports. China can also encourage domestic companies to invest in the U.S., which will help cut the trade imbalance and create local jobs. It is also important for China to continue to reform its foreign exchange policy to make it more flexible and market-oriented.
Trump’s attempts to revitalize manufacturing in the U.S. also requires economic restructuring and international coordination. The U.S. should give full play to its own competitive advantages to boost outbound trade such as increasing high-tech exports to China, instead of adopting a protectionist approach to pressure trade partners.
Economic ties have laid a solid foundation for China-U.S. relations over the past four decades — with annual bilateral trade volume hitting $600 billion last year — and a delicate balance is needed to maintain it. Viewing currency-related issues in the correct light is vital to both countries’ economic progress, as a further slowdown of the Chinese economy and the continued rise of the U.S. dollar could escalate trade frictions. To avoid the glum scenario of a possible trade war, both countries should step up efforts to fine-tune their economic policies and push forward reforms at home that will ensure future prosperity.
Hu Shuli is the editor-in-chief of Caixin Media.
Founder & Publisher, Caixin Media
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