Why the China Manipulator Label Looks Increasingly Appealing to Trump

The name-and-shame maneuver may not be a long shot.

Panmure's French: China as a currency manipulator.

Donald Trump wasn't the first U.S. presidential candidate since the century began to blast China for manipulating its currency for trade advantage, but it's increasingly likely he'll be the first to follow through on the threat once in office.

That's the perspective of economists at Bank of America Merrill Lynch, led by Helen Qiao, chief Greater China economist at the bank in Hong Kong, whose views have evolved in recent weeks given the sustained protectionist rhetoric coming from the incoming president.

"It has been increasingly difficult to dismiss concerns that President-elect Trump will adopt protectionist trade policies that may hurt trading partners as well as the U.S. itself," Qiao and her colleagues wrote in a note last week.

While designating China an official manipulator of its exchange rate for the first time since 1994 poses some technical hurdles, not least because the agency in charge of the process is the Treasury Department, not the White House—it may be a more appealing option than some of the alternatives. Trump once broached the idea of a 45 percent tariff on imports from the largest Asian economy, something the president has the power to do, though that could trigger a U.S.-China trade war.  

China has made clear that it's ready to rumble if Trump takes punitive measures on Chinese products and has reportedly prepared retaliatory options, ranging from antitrust action against American businesses to cutting government procurement from U.S. companiess.  The Treasury's manipulator label, by contrast, doesn't necessarily mean any material punishment for Chinese exports to the U.S. 

The labeling in the semiannual Treasury foreign-exchange report, due each April and October, would involve tweaking the rules defined during President Barack Obama's tenure. The latest release showed China meeting just one of the three conditions, with its bilateral trade surplus a large multiple of the minimum $20 billion trigger; its current-account surplus and official foreign-exchange purchases were too small to qualify. 

Even so, "since they are not legally binding, it is not impossible that the future president would ask his Treasury secretary to revise the criteria, or use his discretion to label China as a manipulator anyway," the Bank of America Merrill Lynch analysts wrote. That's despite the fact that China nowadays has been intervening to support the yuan against the dollar, not drive it down. 

Source: Bank of America Merrill Lynch

The attraction of the manipulator label—however patchily conceived—could be, on the one hand, to deliver something to Trump voters. On the other, it could give China a prod to engage in bilateral talks to address a bilateral U.S. trade deficit that measured $319 billion in 2016 through November. 

"The main point of naming China as a currency manipulator would be to bring China back to the negotiation table at the lowest cost," Qiao and her team wrote. 

The danger, though, is a deeper rift in bilateral ties that damages confidence and roils financial markets, Bank of America Merrill Lynch concluded:

We believe China would start by strongly protesting against the labeling with the IMF, but not to initiate more aggressive retaliation (such as selling US government bonds from their official reserves) immediately. That said, even a "war of words" could weaken investor confidence not only in the US and China, but globally.