It was one of several recent about-faces on policy ― from Syria to NATO to the Federal Reserve ― hailed by mainstream political analysts as evidence that Trump is finally walking back some of the more unorthodox stances from his presidential campaign.
But some economists who agree that China is not presently depressing its currency nonetheless worry that Trump’s evolving thinking could signal a diminished appetite for tackling the broader issue of China’s currency policies and the closely related issue of its massive global trade surplus.
Jared Bernstein, a senior fellow at the liberal Center on Budget and Policy Priorities, welcomed Trump’s recognition that China is no longer manipulating its currency as an indication that the president is “being more connected to the reality of the situation than he was.”
He is nonetheless concerned that Trump’s comments could reflect the rising influence of Goldman Sachs alumni ― such as National Economic Council Director Gary Cohn and deputy national security adviser Dina Powell ― who, by virtue of their backgrounds, are more sympathetic to the status quo.
“There is still the potential for significant and distortionary imbalances in international trade and finance. One worries that the Goldman [Sachs] wing of the White House is kind of assuming that away,” said Bernstein, who was former Vice President Joe Biden’s chief economist from 2009 to 2011.
Former finance executives are less likely to view rebalancing trade with China and other trading partners as an urgent priority, since making it easier to import cheaper foreign goods has fattened the profits of companies they invest in, Bernstein argued.
“If you are a multinational corporation … your stakes in the game are pretty different than a family in a manufacturing community in the Rust Belt,” he said.
As Bernstein noted, Trump was technically correct when it comes to China’s current behavior.
“Currency manipulation” is when a country uses foreign currency it earns from exporting goods to buy up assets denominated in that currency. By stockpiling foreign currency, such as U.S. dollars, the purchasing country can raise a currency’s value on the global market, thereby making goods sold in that currency more expensive and less competitive.
The exact criteria used to determine whether a country’s currency policies have crossed the line into manipulation vary.
It is clear though that China has not been manipulating its currency in a way that would advantage its exports for a few years now. In fact, for over a year and a half, China’s central bank has been propping up the yuan by steadily selling off its foreign currency reserves. It now holds some $3 trillion in foreign reserves, down from a peak of almost $4 trillion in 2014.
Of course, China is acting to stave off a precipitous drop in the yuan’s value as an economic slowdown prompted its citizens to move their money overseas. Its actions have not resulted in an appreciable rise relative to the dollar. The yuan has roughly the same value relative to the dollar that it had in 2010.
Some centrist and liberal economists who disagree with Trump on other matters, however, were sympathetic to his insistence that the U.S. needed to reduce its trade deficit with China ― even when they disliked the way he went about saying it. From the early to mid-2000s through about 2013, China was indeed manipulating its currency, the largest of several techniques it used to become a net exporter of goods to both the United States and the world.
A broad array of experts now agree that these practices contributed to a massive loss in U.S. manufacturing jobs that harmed the American middle class. A January study released by Robert Scott, director of trade and manufacturing policy research at the labor-backed Economic Policy Institute, estimated that trade with China cost the U.S. 3.4 million jobs from 2001 to 2015, the vast majority of them in manufacturing. An academic study using more conservative assumptions concluded that Chinese trade deprived the U.S. of as many as 2.4 million jobs from 1999 to 2011.
Economists who believe the trade deficit should be smaller argue that China’s accumulated surplus of foreign currencies still tilts the scales for its exports.
“While it may be technically true that China is no longer acquiring dollar-denominated assets, they still hold more than $3 trillion in foreign currency reserves, and probably $1 trillion in other investments,” Scott said. “It is clear that China’s currency needs to rise in value.”
The yuan would need to rise in value by 25 to 30 percent to reasonably rebalance global trade, he estimated.
The trade-offs to date have been in favor of the pharmaceutical industry, the entertainment industry, the software industry, the financial industry, and against U.S. workers. And I’d flip those priorities. Dean Baker, Center for Economic and Policy Research
Few dispute that China needs less than the $3 trillion in foreign currency reserves it currently holds to withstand a major financial shock.
In fact, it needs no more than $2 trillion and probably significantly less, according to Joseph Gagnon, a senior fellow at the centrist Peterson Institute for International Economics who has co-authored a book on currency manipulation due out in June, Currency Conflict and Trade Policy: A New Strategy for the United States.
Gagnon agrees with Scott about the need for the U.S. to rebalance trade with China, albeit for different reasons. He maintains that importing so many goods from China and other nations is financially unsustainable for the United States because of the private and public borrowing it requires.
But China’s steady drawdown of its currency reserves in recent years has convinced Gagnon that Trump should not pressure China to accelerate the pace at which it is already reducing its stockpile.
“I would be hard-pressed to justify asking China to do more than it’s already been doing in the past two years on the currency,” said Gagnon, a former economist at the Federal Reserve and the Treasury. “To fault them right now would be insane because it would be punishing good behavior.”
Trade negotiations are always a give and take between the different parties, however. Eswar Prasad, a Cornell professor who led the International Monetary Fund’s China desk in the 2000s, told The New York Times that the United States was aware of the currency manipulation issue at the time, but obtaining “greater market access, better intellectual property rights protection, easier access to investment opportunities” were simply higher priorities.
Prasad’s comments support the belief of economists such as Dean Baker, co-director of the progressive Center for Economic and Policy Research, that putting more emphasis on issues like currency that affect workers could lead to significantly different outcomes.
“The trade-offs to date have been in favor of the pharmaceutical industry, the entertainment industry, the software industry, the financial industry, and against U.S. workers. And I’d flip those priorities,” he said.
Trump seems to have a different type of bartering in mind when it comes to U.S.-China commerce. He tweeted on Tuesday that he is open to relaxing his trade-related demands on China if it would help defuse tensions with North Korea.
The comments disconcerted Scott of the Economic Policy Institute.
“I am increasingly concerned that Trump is going to follow in the footsteps of his predecessors and not sanction China for currency manipulation and trade off the interests of working Americans for other vague foreign policy goals like convincing the North Koreans to slow down production of nuclear weapons. It is a serious mistake,” Scott said.
Trying to achieve geopolitical goals through policies that enable offshoring of manufacturing jobs “rarely works,” he added.
Asked whether Trump still views China’s currency value as problematic and plans to take steps to address it, the White House referred The Huffington Post to press secretary Sean Spicer’s comments about Trump’s currency manipulation pivot on Thursday.
“It’s a very complex issue and I’m going to leave it to the president to specifically answer that,” Spicer said. “The president is going to continue to make significant progress when it comes to that issue and to how our relationship is with China.”
Spicer also dismissed the notion that Trump had dramatically changed the policy positions that he campaigned on.
“If you look at what’s happened ― it’s those entities or individuals in some cases ―or issues ― evolving toward the president’s position,” he said.