Financial Times

Why label China as a currency manipulator now?

Well, it is something that administrators have considered in the United States for close to 20
years. It is something that the Trump administration has been talking about since the very
beginning of the administration, but it kind of fell off the radar. Donald Trump made it very clear
that it was something he wanted to do, and then was talked out of it internally and it wasn’t really
a part of the early trade discussions within the administration. But now a lot of the people who
resisted have left and it looks like the other people who have resisted have given in to this
demand. So why now? The problem for the US Treasury and for the White House is there aren’t
a lot of really good options to do anything about the value of the yuan versus the dollar, and
here’s the reason why.

The dollar is overvalued against a bunch of different currencies. The dollar is overvalued in
general. The US is about 25% of global trade but the dollar itself is used, it says, for about 60%
of central bank reserves. It’s a comparable percentage. We think about 50% to 60% of the
denominations of international trade contracts. The dollar is used far beyond its value of buying
things that are made in America. That means that the dollar’s value is going to be artificially high
which means if you make things in America and you want dollars for them, you’re going to have
a hard time selling abroad. This is true all over the world. It’s not just true in China. And
particularly for the last five years or so, the FED until very recently, was in a hiking cycle. It was
making it more attractive to move your capital to the United States and invest. The European
Central Bank and the Bank of Japan were doing the exact opposite. They were sort of
discouraging the value of assets. They were driving down the value of assets, which again
discourages the people from buying those currencies. So if you want to do something about the
value of the dollar (and it’s not just Donald Trump who wants to do this) to encourage American
manufacturing, you have to convince the FED that it’s got to drop way below what’s indicated.
It’s preparing to drop, and then you have to get a bunch of other central banks – which you don’t
even have jawboning control – to do you a favour basically, and raise rates on their own
economy to encourage investment from abroad in their economy which feels very unlikely. So
right now, all the Trump administration really can do is jawbone. All it can do is say: We think
that the dollar should be less value. They can say: We’re considering changing the 20-year-old
strong dollar policy.

Why declare China a currency manipulator now?

Well, the answer is they needed to do something, and right now, it’s the only thing they can do.
Economics Explained

Why does China Manipulate its own Currency?

As the world’s second largest economy, a homes to a radically different market system than the
US, it is almost inevitable that this nation is just a great opportunity to see a lot of interesting
economics in action. In fact, a lot of that controversy actually comes from the way this nation
handles its economy and what these actions mean for the workers and consumers in the western
world. Chief amongst these concerns is trade. Pretty much everything is made in China. From
low quality disposable toys to high-end electronics, the nation has become the workshop of the
world. To the USA which rose to its prominent position today by also once been the workshop of
the world, this can seem very threatening. This perceived threat, true or otherwise, has led to
hostilities like the US-China trade war, as well as a host of other tensions between China and
other nations as it spreads its influence over the world. Now we are not here to speculate over
China’s plans for world domination but instead, we are here to use this tension to explore
something that has come up time and time again out of all of this and that is the idea that China
is not playing fair in the game of global trade and that they are cheating other countries,
companies, and consumers out of business by manipulating their currency.

How does a nation like China control their own currency?

Can this be actually used to give an unfair advantage in global trade?

If it can, why doesn’t every country do it?

Can businesses profit off this man-made market failure?

Does currency price even matter?

At the end of the day, someone could go to Japan and be a millionaire because their currency has
such a low denominated value but that doesn’t really mean anything for global trade or our
would-be baller.

The phrase currency manipulation has a sinister vibe. It’s almost never good to be called out for
manipulating anything but is this more of a case of bad branding or is this a genuine
underhanded attempt to ruin their competition? Well, perhaps the best way to actually assess this
is to look at how a nation does control their currency and by extension, how this impacts price
competition.

In general, most nations want to export lots of goods and services and import only what they
really need to. This relationship imports versus exports is noted in a trade surplus (if a nation
exports more than they import) or a trade deficit (if they import more than they export).

You have no doubt heard the term trade surplus a lot because it’s a commonplace political
football. A trade deficit sounds bad and politicians will use this to scare people into thinking that
their nation is losing the ability to make anything for themselves, which can actually be
somewhat true. Free trade is almost always a good thing for the overall wealth and prosperity of
the nations engaging in that free trade but this prosperity can often come at the expense of local
industry. For example, the UK used to have a very strong auto industry with a local branch of
General Motors operating in the nation under the name of Vauxhall, as well as the usual group of
Mini, Rover, Jaguar, etc. This industry employed tens of thousands of workers and they made
just absolutely terrible cars. Even if these cars were sort of garbage, the government looked after
these companies. If these international competitors wanted to sell a car in the UK, they would be
more than welcome to do so but they would have to pay import tariffs. These tariffs are taxes
levied on imports and they could be steep. A Toyota Corolla might have competed with a
Vauxhall Astra on price in a perfectly fair market but if a Japanese manufacturer had to pay a
30% import tariff, then they would have to pass this expense on to their consumers, making their
car simply too expensive for most households to consider over the domestic manufacturer. This
is part of the reason why if you watch old movies or TV shows having something like a Honda
was actually a pretty serious flex. Now these import tariffs were great for keeping the local
business operating and by extension their employees employed but it was still a net loss overall.
The world is much better off today where everyone can buy a decent car for a decent price
produced by businesses that have to compete and trade internationally. As nations realize this,
barriers to trade like the aforementioned import tariffs have become less and less common.
However, some nations are still looking to get a bit of an edge in less obvious ways. Chief
amongst these techniques is lowering the value of their own currency artificially.

A low-valued currency sounds kind of bad. If you were to hear a news report saying that
Japanese yen lost 3% of its value overnight, your first question might be, “Oh no, what has 2020
done to Japan?” But in reality, there are some big benefits to have a lower-valued currency. For
starters, if your currency is less valuable, then importing stuff becomes more expensive. Now
this sounds bad but for example, someone is tossing up between a Cadillac and a Mercedes, they
might be pretty cost comparable. If the US dollar loses half of its value though then that
Mercedes is going to be twice as expensive to purchase because it is going to take double the
amount of American dollars to pay the German auto manufacturer in euros. This means that an
American car buyer will just have to stick with the Cadillac and the American auto
manufacturing lives to see another day. This achieves the same thing as the tariffs but it does not
break any rules of any trade agreements that will normally stipulate that tariffs are banned. Even
better still, the opposite effect is also true if a German was making that same decision, then they
would suddenly see that for the same portion of their euro savings, they can now buy two
Cadillacs making it more tempting of a proposition than their locally offered Mercedes.
Obviously, any self-respecting German would not be caught dead driving a Cadillac so this
example is a bit oversimplified but it goes to show that devaluing a currency is a big win for
local industry.
A question that a lot of switched-on people ask is, “Wouldn’t prices just adjust to reflect this?” I
can go to Japan and trade in 10,000 US dollars for 1 million Japanese yen but that hardly makes
me a millionaire, right? That’s correct. 1 million yen probably has the same purchasing power as
about 10,000 US dollars. But in reality, probably even less given the cost of living in Japan
versus the United States. Over a long enough timeframe, free floating currencies will normally
even out on purchasing power even if that means the nominal figures are different. But a nation
like China is not de-pricing their currency but they are devaluing their currency. Price and value
are terms that are strongly related to each other but think of it this way: Apple shares are about to
be split into four, what this means is that someone holding 10 Apple shares on the 27 th of August
will wake up the next day with 40 Apple shares. Sounds good but these shares will now be only
worth 1 quarter of what they were previously worth. So the would-be investor has not really
made any money off this split. All other things been equal, the benefit of this though is that
Apple shares are now easier to invest in because small-time traders