Author:Calomiris, Charles W.

The Trump administration began the year by pivoting in its stated approaches to trade with China and Mexico, backing off from threats to overhaul NAFTA, and "redefining" Chinese currency manipulation to focus on trade distortions. In an interview published in the Wall Street Journal several months ago (Baker, Lee, and Bender 2017), the president went further, saying that he might give up on his trade liberalization goals with China if the Chinese "solve the problem in North Korea." Although a NAFTA overhaul has reemerged as a stated goal of the administration in recents months, President Trump's recent trip to China, and his many conciliator)' statements about President Xi Jinping, give further grounds for believing that geopolitical goals may trump economic ones in the current negotiations with China. That would be a mistake. China's unfair practices in trade, intellectual property, and other areas need addressing, and the time has never been better. The president should not cede too much ground to achieve geopolitical goals. His bargaining power with China may be stronger than he thinks.

Currency Manipulation: Rhetoric versus Reality

At the same time, the movement away from rhetoric about currency manipulation is a positive change. Accusations of currency manipulation by Chuck Schumer, Donald Trump, and others that were made regularly for the past two decades never made much sense as explanations for Chinese growth or for die persistent U.S. trade deficit with China. First, it's impossible for monetary policy (including exchange rate policy) to produce long-run growth or trade consequences. Indeed, the principle of long-run "monetary neutrality" is one of few tenets in economics believed by virtually every trained economist. If a nominal exchange rate were set at an undervalued level, eventually differences in domestic and foreign inflation would make it correctly valued. This is the conclusion of every model used by economists of die "real exchange rate" (the ratio of the exchange rate between two currencies divided by the relative price level ratios in the respective countries).

Second, the facts of Chinese exchange rates show that the Chinese government has not been trying to keep its currency weak. Indeed, the opposite is the case. The renminbi (RMB), also known as the yuan, appreciated 26 percent on a trade-weighted basis from 1995 to 2014. And China's real exchange rate (which captures the relative competitiveness of the prices of...

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