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Trump administration officially declines to label China currency manipulator

The Washington Post logo The Washington Post 4/14/2017 Ana Swanson, Max Ehrenfreund

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Related video: China not manipulating currency, experts say (provided by Reuters)

The Trump administration has chosen not to brand China a currency manipulator in an official report, reversing one of the president’s most prominent campaign promises on trade.

In a semiannual report on America’s major trading partners published late Friday, the Treasury Department declined to label any country a currency manipulator, though it kept China, Japan, Korea, Taiwan, Germany and Switzerland on a “watchlist" of countries that merit close attention for their currency practices.

During the campaign, Trump often claimed that China was manipulating the value of its currency to boost its exports, a policy that cost the United States manufacturing jobs. He promised to label the country a currency manipulator on day one of his presidency.

But 83 days into his presidency, the president struck a different chord.

“They’re not currency manipulators,” Trump told The Wall Street Journal in an Apr. 12 interview, adding that China hasn’t been manipulating its currency for months and that labeling China a manipulator could discourage the country from helping the United States with North Korea.

Economists agree that China doesn’t currently merit the label of currency manipulator, and has not engaged in the practice for several years.

The value of a currency is determined by supply and demand, and currency manipulation occurs when a country buys or sell large amounts of its own currency on global markets in order to change the price.

But U.S. policy is really directed at countries which sell large volumes of their own currency to lower its price -- a practice that has the effect of making a country’s exports relatively cheap on global markets and hurting American exporters.

“When our trading partners engage in currency manipulation, they impose significant, and often long-lasting hardship on American workers and businesses,” Treasury Secretary Steven Mnuchin said in a press release that accompanied the report. “Expanding trade in a way that is freer and fairer for all Americans requires that other economies avoid unfair currency practices, and we will continue to monitor this carefully.”

China held down the value of its currency, called the renminbi, RMB or yuan, to help its exporters for roughly a decade, a practice that critics say helped to decimate the American manufacturing industry. But recently, China's behavior has been different. For the past several years, the country has actually been doing the opposite, propping up the value of its currency, which helps American manufacturers.

The Treasury report acknowledged as much.

“[A[fter engaging in one-way, large-scale intervention to resist appreciation of the RMB for a decade, China’s recent intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation that would have negative consequences for the United States, China, and the global economy,” the report read.

The report is the latest sign of a dramatic shift in economic policy for Trump, who won the support of many voters by promising to get tough on the country's biggest trading partners, especially China and Mexico.

Trump signed a presidential memo on Jan. 23 to officially withdraw the United States from the Trans-Pacific Partnership, an Obama-era trade deal that Trump had heavily criticized. He signed two more executive orders in April directing government officials to investigate the unfair practices of trading partners.

But other prominent promises Trump made on the campaign trail, including renegotiating the North American Free Trade Agreement and hammering out better terms of trade with China, have yet to materialize.

Some supporters say this is only natural. Congress has yet to confirm one of the administration’s top negotiators, United States Trade Representative nominee Robert Lighthizer. But as the days run on, Trump's supporters may be losing patience.

A 2015 law requires the Treasury Department to review the currency practices of major trading partners using three criteria: One is having a large bilateral trade surplus with the United States – meaning the country exports a lot more to the United States than it imports from the country, like China does.

Another is having a large current account surplus, which means that a country is purchasing a lot of foreign assets with the money it accumulates from exporting more than it imports. The third criteria is “persistent one-sided intervention in a foreign exchange market” – that a central bank is persistently buying or selling its currency to change its value.

While it stops short of labeling the country a currency manipulator, the Treasury Department report criticizes China for past current manipulation that “imposed significant and long-lasting hardship on American workers and companies” and warns that the United States “will be scrutinizing China’s trade and currency practices very closely.”

“China will need to demonstrate that its lack of intervention to resist appreciation over the last three years represents a durable policy shift by letting the RMB rise with market forces once appreciation pressures resume,” the report says.

The report reiterated the Obama administration’s recommendations to other countries on the list for reforms. Germany, South Korea and Switzerland should increase public borrowing to support domestic demand for goods and services, the report suggested. The Treasury Department continued to call for reforms to the labor market that would improve Japanese workers’ productivity, along with fiscal and monetary support for the Japanese economy.

The report also called on Taiwan to be more transparent in its purchases of currency on global markets.

By giving consumers more to spend, such policies would likely increase imports in these countries, reducing their trade surpluses. Increased spending would also contribute to inflation, implying those country’s currencies would be stronger in real terms.

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