PK: S, a yuan currency war...

So, A Yuan Currency War

Paul Krugman

On Monday night the U.S. Treasury designated China a currency manipulator. This was deeply ironic to those of us who follow such things.

After all, Treasury shied away from calling China on its currency policy back in 2010, when the accusation was actually true, and the deliberate undervaluation of the renminbi, China's currency, was doing real harm at a time of mass unemployment. As best I could tell — and I was talking to people with some inside information at the time — the Obama administration decided that accusing China of currency foul play, although it would have been accurate, would be counterproductive.

For while currency manipulation is illegal under international agreements, there isn't any clear remedy. The Obama administration therefore feared that it would face a nasty choice: look ineffective by accusing China of sin, then doing nothing about it, or respond with tariffs that might set off a destructive trade war.

Things are very different today. At this point, China's currency policy is actually fairly benign; if anything, its policies are keeping the renminbi stronger than it would be otherwise. Meanwhile, U.S. unemployment is low. There are plenty of things to criticize about China, but currency policy isn't one of them. With unerring aim, the Trump administration has decided to accuse China of the one crime of which it's innocent. Of course, this administration doesn't have to fear setting off a trade war, since it has already done that.

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Let's back up for a minute. What does currency manipulation even mean? Currencies aren't commodities like soybeans or natural gas, which have "natural" prices determined by supply and demand. Instead, we live in a world of "fiat" currencies created by governments; the supply of dollars is whatever the Federal Reserve says it should be. If a government decides for whatever reason to change the supply of money, the price of that money will change, but that's not manipulation in any meaningful sense of the word.

So what we mean when talking about currency manipulation is fairly subtle: it refers to actions governments take to keep their currencies weak so as to achieve a competitive advantage. And China was doing that back in 2010: it was buying dollars to keep its own currency weak, and imposing controls to keep foreigners from investing a lot of money in China, which would have pushed the renminbi up.

Since 2013, however, China has been doing more or less the opposite: generally selling dollars, while imposing controls on the ability of its own residents to take money out of the country. To the extent that it is manipulating its currency, it's doing so to keep the renminbi up, not down.

What China did Monday was to slightly relax its support for the currency, allowing it to fall through the symbolically important level of 7 to the dollar. So the U.S. is calling China a currency manipulator because it has, um, stopped intervening to keep its currency up. Orwellian much?

Of course, economic logic has very little to do with any of this. Trump wants China to make splashy concessions in the face of his tariffs; China let its currency slide a bit to signal that it won't be bullied. Basically, it's "Sanction me? No, sanction you!"

This isn't likely to end well.

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John Case
Harpers Ferry, WV

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