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ON THE 11th HOUR: when the war went quiet
Trump saw his chance to make good on his election promise to label China a currency manipulator, and he took it
You have to hand it to Donald Trump: He keeps his promises.
Back when he was running for president, he vowed to label China a currency manipulator. China’s game, he claimed, was to devalue its currency for the nefarious purpose of stealing American jobs and undermining American business. Never mind that, by the time Trump was running for POTUS, China — to the extent it was “manipulating” the yuan at all — was doing so in what many analysts believe was an effort to prop up its value.
And never mind that the Obama administration had declined to label China a currency manipulator — a designation that means the offender is offside international agreements, and could be open to a raft of punishments — when it actually was working to devalue the yuan, on the perfectly reasonable grounds that doing so would undermine Sino-American relations and threaten a trade war. Maybe that’s really why Trump wanted to tag China a manipulator: because Obama didn’t do it.
Until recently, even his own Treasury department obviously decided that wasn’t quite enough. But earlier this week, Trump saw his chance to make good on his election promise, and he took it. Last week, trade talks between the U.S. and China in Shanghai ended without a deal and, even though both sides called them “constructive,” Trump the Tariff Man did a turnabout and said he would slap a 10-per-cent tariff on the US$300 billion worth of Chinese imports he hasn’t already taxed, come Sept. 1. (More talks, by the way, had been scheduled for that month.)
Then, on Monday, the People’s Bank of China (PBOC) let the yuan slip below the “symbolically important” level of seven to the greenback — the weakest the Chinese currency has been in more than a decade. And quicker than you could say “the concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive” (or take your pick of windy tweets), the Treasury department slapped China with the currency manipulation label.
Markets were already freaked by the new round of tariffs, and Treasury’s move poured gasoline on the fire. Not because it actually meant very much (it probably doesn’t), but because it suggested the trade war investors had been hoping would just go away wasn’t going to anytime soon, and could very well get a lot worse.
For what it’s worth, the PBOC was quick to say that its move to let the yuan slide was in response to market forces, and that it has not played the currency devaluation card. You might not take that assertion at face value, but there was some action in derivatives markets on Tuesday that suggested China was working to support the yuan in order to keep the decline in check. Which would make sense. After all, devaluation might bring some benefit to China by making its exports more attractive and pushing the U.S. dollar, but too much devaluation would also bring some pretty heavy risks, in the form of capital flight and higher debt service costs. As well, given the slowdown in the Chinese economy — clearly not unrelated to Trump’s trade war — some devaluation below the seven-yuan peg seems reasonable, at least if market forces were allowed to work as they would like.
Which only highlights the absurdity of the Trump administration labelling China a currency manipulator.
By letting the yuan slide, the PBOC was actually withdrawing support that promoted stability but worked to make Chinese exports less competitive.
The Treasury department, in a statement explaining its decision, seemed to be trying to square that circle by noting that China’s withdrawal of support for the yuan proves that it had been manipulating the currency before it let it slide on Monday. China “has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis,” it said.
Let’s go a little ways further down this rabbit hole. The President had long accused China of artificially driving its currency down when in fact, if anything, it had been doing the opposite. Then, it stops doing the opposite of what the President said it was doing and gets labelled a currency manipulator, even though the stopping bit — letting the currency fall freely — is the opposite of manipulation. Go figure.
Anyway, the next step in the process will be for Treasury Secretary Steven Mnuchin to go to the International Monetary Fund, which could take steps to stop China from doing what it’s not doing. But if the U.S. is hoping for a sympathetic ear for its allegation that China has “extensive experience manipulating its currency,” it might not get one at the IMF. Just last month, the Fund issued a report that concluded China’s approach to the yuan in 2018 had been “broadly in line” with economic conditions and that its “real effective exchange rate would be at the same level as warranted by fundamentals and desirable policies.” Nothing to see here, folks.
The point is — well, I’m not sure what the point is. Except to note that Trump’s negotiating style seems to be to load up the pressure on China, then relent enough to keep hopes up there might be a resolution, then pile on more pressure. Maybe this is his earnest strategy for reaching a resolution. Or maybe this is a cynical bet that bashing China will get him re-elected in 2020. Or maybe he just has no idea what he’s doing.
So let’s not worry about the motivations, and judge by actions. Those suggest a decision-making process that has little regard for the global economy, for the American workers and investors Trump claims to care so much about, for the credibility of the United States in these or other negotiations, or for logic.
It’s tempting to say that it can’t get any worse. But then it does.
Copyright Postmedia Network Inc., 2019