And also partly right about China
If the Chinese weren’t paying attention to the US presidential campaign before, they are now. On August 11 China allowed its currency to devalue by roughly 2% and Donald Trump went ballistic, assailing China for economic misdeeds far and wide with characteristically bombastic style.
Getting past Trump’s signature confrontational tone and examining the actual points he has made, we can say that the Donald isn’t completely off base. But he is largely off base, making accusations that are either completely incorrect or gross exaggerations. Below we examine the veracity of Trump’s recent China tirades.
Trump Comment #1:
“They keep devaluing their currency until they get it right. They’re doing a big cut in the yuan, and that’s going to be devastating for us.”
The Trump comment above is mostly wrong because, in fact, China’s currency has mostly risen of late and China has been supporting its currency, not devaluing it. Specifcally,
China’s currency has been rising
China currency has appreciated by more than 30% over the last ten years which is one of the reasons why the IMF recently stated that it no longer considers the RMB to be undervalued.
China has been supporting its currency, not depressing its value
The Chinese economy is currently passing through the most difficult period it has faced in two decades. This, combined with looser capital controls, has led to capital flight from China, putting downward pressure on the Chinese currency. Capital flight is bad for the economy as it decreases investment which hinders growth. That’s why, for at least the last six months, if not longer, China has actually been supporting the RMB, i.e., trying to prevent its depreciation.
Other countries have devalued much more than China recently
Over the last 12 months both the Euro and Yen have depreciated by more than 15% against the US dollar. We don’t call any of these other countries “currency manipulators” but the fact is that many of them have pursued monetary policies that have inevitably led to a lower currency. China’s is the only major currency that hasn’t been actively devaluing over the past year and its recent decline of 3-4% is small as compared to other countries.
Trump Comment #2:
“China has rebuilt itself with the money it’s sucked out of the United States and the jobs that it’s sucked out of the United States.”
Trump and others who agree with him ignore several critical factors, including 1. ) lower cost products reduce the cost of living in the US; 2.) other factors, including automation, have a much larger impact on manufacturing employment, and that; 3.) even countries that tend to run a manufacturing trade surplus, like Japan and Germany, have seen manufacturing employment decrease, just like the US, because that is a natural part of economic development.
Most importantly, Trump ignores recent economic history in China. Along with a rising currency there has been tremendous wage inflation in China as well, with worker incomes more than doubling over the last 7-8 years. Yet China’s export competitiveness has remained strong. China has actually gained market share on higher value added products like computers, electronics and appliances. Relative to lower value added products, like apparel, shoes, and toys, China has lost market share, but not precipitously. It is worth noting that, for the most part, China’s lost market share has not gone to US, but to Vietnam and other low cost countries. This is evidence that it is China’s relatively low wages and rising productivity has driven its exports, not currency manipulation. It is also evidence that we shouldn’t expect changes in China’s currency to cause huge movements in the manufacturing employment in the US.
Trump Comment #3:
I have friend that are manufacturers they cannot get their product into China. So, if they’re going to do it to us. We have to do it to them.”
This is Trump’s strongest point. China has plenty of room to further open its market to US exports and investment. To put this in perspective, most emerging markets have high trade and investment restrictions. China has actually done a fairly good job of lowering its restrictions over the years. In fact, China’s average tariff rate, according to the WTO, is lower than that of Russia, India, Brazil, and even South Korea. So China isn’t actually out of step with the rest of the world. We simply pay more attention to China because it is both huge and economically successful. Still, pushing China for greater market access would be good for both us and China. That goal, as opposed to punishing China for its exports, should be our priority.
If Donald Trump wants to win an election, maybe he will continue to make the same points he has been making. But if he wants US policy toward China to actually improve, he might want discard outdated notions (like currency manipulation) and focus more on the real issues of the day (market access).