The United States took the rare step on Monday of formally labeling China a currency manipulator, as trade relations between the two countries continued to spiral downward after President Donald Trump’s decision last week to impose additional tariffs on Chinese goods.
“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department said in a statement that followed the People’s Bank of China’s decision to let its currency, the renminbi, fall to the lowest level in more than a decade.
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U.S. Treasury Secretary Steven Mnuchin made the determination acting “under the auspices of President Trump,” the department said. Mnuchin will now “engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions,” it added.
Previous administrations have been loath to label China a currency manipulator, arguing it was better to work with other countries to put diplomatic pressure on Beijing. The last time Treasury designated any country as a currency manipulator was in the early 1990s, when China was named.
During the 2016 presidential campaign, Trump promised to formally label China as a currency manipulator on his first day in office. But he declined to do that, reflecting the prevailing view at the time that Beijing was not devaluing its currency for an unfair trade advantage.
Since then, the Treasury Department has kept China on a currency watch list in five semi-annual reports issued under the Trump administration, but had not formally labeled it a currency manipulator. The next report is due on Oct. 15, but Mnuchin acted ahead of schedule.
The trade tensions had already driven stocks lower Monday before the Treasury’s designation. Both the Dow Jones Industrial Average and the broader S&P 500 fell around 3 percent, extending losses from last week. Soybean prices were also under pressure at the Chicago Board of Trade.
The penalties associated with the U.S.’ move include asking the IMF to increase surveillance of China’s currency practices. The United States could also deny Chinese companies access to financing from the Overseas Private Investment Corporation and prohibit them from bidding on U.S. government procurement contracts. But those do not kick until after a year under the authorizing statute.
However, the Commerce Department has previously proposed treating undervalued currencies as an illegal trade subsidy. If that becomes final, Treasury’s designation could help open the floodgates to a number of trade remedies cases seeking countervailing duties on Chinese goods.
Treasury’s action “is more symbolic than anything at this point and aimed at Trump’s hard core political base that he will need to shore up now that the economy is broadly decelerating in part due to the trade conflict,” said Joe Brusuelas, chief economist at RSM. “Moreover, it marks the start of a process that my end in the Trump administration attempting to devalue the dollar.”
That possibility was also on the minds of other economists, given Trump’s concern that the strength of the dollar hurts the United States in international trade by making its exports more expensive.
“China will view this as unjustified and, therefore, is likely to retaliate, thereby signaling further tension escalation,” said Mohamed A. El-Erian, chief economic adviser at Allianz. “It signals a new step in the weaponization of economic instruments, also raising the probability of both trade and currency wars.”
Some feared a replay of the disastrous replay of U.S. actions under the Smoot-Hawley Tariff Act in the 1930s and tit-for-tat responses by other countries that many blame for prolonging the Great Depression.
“No doubt about it: We witness the two largest economies in the world in full economic, trade, currency war and this gets worse before it stabilizes,” David Kotok, chairman and chief investment officer at Cumberland Advisors, said in an email. “Recession risk rising. Smoot-Hawley replay is now underway.”
The U.S. move came after Beijing fired back at Trump’s decision to slap tariffs on more Chinese goods by halting purchases of U.S. farm products and letting its currency weaken to 7 yuan to the dollar.
The president’s decision last week to impose a new 10 percent tariff on $300 billion worth of Chinese goods was “a serious violation” of the agreement between Trump and Chinese President Xi Jinping at a meeting in Osaka, Japan, on June 29, China’s Ministry of Commerce said in a statement.
China “will not rule out import tariffs on newly purchased US agricultural products after August 3, and Chinese related companies have suspended purchasing US agricultural products,” the statement said. The stronger dollar relative to the Chinese currency will further hurt U.S. exports there.
Trump announced the latest round of tariffs after his trade negotiators returned from talks last week in Shanghai frustrated that China had not made any new proposals in negotiations aimed at resolving U.S. concerns over Beijing’s trade practices and industrial policies.
The new duties are scheduled to take effect on Sept. 1 unless the two sides are able to patch things up before then. But on Monday, that possibility seemed increasingly remote.
Hours before the Chinese Commerce Ministry announcement, Trump was already upset with the decision by the People’s Bank of China to allow the value of China’s yuan, officially known as the renminbi, to fall.
“China dropped the price of their currency to an almost a historic low,” Trump wrote on Twitter. “It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
U.S. officials had no immediate comment on the Chinese Commerce Ministry statement. However, U.S. farm sales to China are already down sharply this year a result of the trade war.
The U.S. Agriculture Department has forecast American farm exports to China at just $6.5 billion in fiscal 2019, which ends Sept. 30. That‘s down from $16.3 billion last year and from more than $20 billion annually when Barack Obama was president.
With his early morning tweet, Trump lashed out at two of his favorite targets at the same time: China and the Federal Reserve.
He’s also been heaping pressure on the Federal Reserve to cut interest rates to boost the U.S. economy. Last week, the Fed cut its key interest rate by a quarter of a percentage point, citing the uncertainty caused by Trump’s trade policies as one reason for the move. Lower interest tends to drive down the value of the dollar.
White House trade adviser Peter Navarro, in a “Fox News Sunday” interview, expressed frustration over a 10 percent decline in the value of the yuan since Trump started imposing tariffs on China over a year ago.
Economists disagree with the administration’s view of the tariff impact. They note the duties are actually paid by U.S. importers, rather than the Chinese government.
A U.S. business and agricultural group coalition, under the name “Tariffs Hurt the Heartland,” called on the countries to return “immediately” to the negotiating table before more U.S. farmers, workers and small businesses are further hurt by the conflict.
“It’s never been more clear that tariffs are a failing strategy. Behind today’s market turmoil are real Americans who have been used as bargaining chips in this trade war,” Jonathan Gold, a spokesperson for the group, said in a statement.
The Tax Foundation, an independent nonprofit group, estimates that Trump’s threat to impose a new 10 percent tariff on $300 billion worth of Chinese goods amounts to a tax increase of $30 billion, on top of a tax increase of more than $60 billion from his earlier tariffs on Chinese goods.
Despite Trump’s decision to impose more duties, the administration still plans to host Chinese officials in Washington in early September for another round of trade talks.
For the two sides to reach a deal and for Trump to eliminate the tariffs he’s already imposed, China must stop its “seven deadly sins,” including currency manipulation and other practices such as providing huge subsidies for its state-owned enterprises and forcing American companies to transfer their technology, Navarro said.
One of Congress’ toughest China hawks said earlier on Monday it was past time for Trump to call Beijing out for currency manipulation.
“China has been manipulating their currency long-before and since President Trump took office,” Senate Minority Leader Chuck Schumer said in a statement. “He should finally tell his Treasury Secretary to label China a currency manipulator. That’s all he needs to do to make it happen.”