For the Chinese government, November 2016 can't arrive soon enough. Last week's currency devaluation ensured Beijing will serve as a political punching bag during America's presidential campaign.
Donald Trump set the stage with tweets like "Devalue means suck the blood out of the United States!" and "I've been warning about China since as early as the 80’s. No one wanted to listen. Now our country is in real trouble." Republican Senator Lindsey Graham called the devaluation "just the latest in a long history of cheating," while Democratic Senator Bob Casey urged the Treasury Department to label China a currency manipulator.
There's a time-warp quality to this sort of China bashing. The assumption among some officials in Washington still seems to be that China is trying to boost its export machine at the expense of American workers. But China's economic priorities -- and the motives for its economic policy -- have shifted dramatically in recent years.
If China were really trying to close factories in Detroit and Seattle, its devaluation would have been on the order of 15 percent or 20 percent, not a mere 3 percent. China is far more concerned about its service sector than manufacturing. Since 2013, services have generated a larger share of China's growth than exports. And that share continues to grow: In the first half of 2015, services accounted for 50 percent of gross domestic product, a rise of 2.1 percent from a year earlier.
The Chinese government, moreover, has reason to think it can outcompete American manufacturing, even in the absence of currency shenanigans. In the five years prior to the devaluation, the yuan surged an inflation-adjusted 33 percent against major trading partners. Chinese businesses nonetheless held their own against the competition. So far this year, China's share of global exports surged to an unprecedented 15 percent from 8.7 percent five years ago.
The reality is China's devaluation was a response to financial markets that have been trying to drive the yuan lower. Beijing probably also wanted to buy itself some breathing room to redouble its economic reform efforts. It's much easier to take on state-owned enterprises and encourage the creation of new small and midsize services when giant exporters (a group SOEs dominate) are happy.
Neither of these goals should cause unease in Washington. The first (a market-determined yuan) is exactly what the White House has long recommended, while the second (a services boom) is something that can only help American manufacturers.
To be sure, there are plenty of reasons to criticize Chinese trade practices. Nomura political analyst Alastair Newton has said that when the history of the early 21st century is written decades from now, the impact of the terrorist attacks of September 11, 2001 may pale in comparison to another epochal moment that year: China's entry into the World Trade Organization.
The prevailing opinion had been that would force Beijing to play by global rules. Instead, China has been bending the international trading system to its own preferences. Global economic norms proved no match for China's subsidies for politically connected enterprises, questionable respect for intellectual property rights, state-sponsored computer hacking, opaque crackdowns on foreign companies, and poor labor and environmental standards.
American officials can also fairly criticize Beijing for exporting pollution, allowing runaway military spending, engaging in provocations in the South China Sea, and supporting rogue regimes like North Korea. But currency policy doesn't deserve a prominent place on any such list.
In fact, U.S. officials should welcome China's devaluation, and respond by requesting a diplomatic quid pro quo: We will look the other way (as we do with Japan) so long as you accelerate efforts to expand service industries. A services boom in mainland China would mean more than just an increase in the number of companies like Alibaba hoping to trade on New York's stock exchange. It would also mean increased living standards for China's 1.3 billion people, which could mean more imports of American goods.
In economics, as in politics, you have to choose your battles, and China's currency policy is a fair subject for debate. But if America's presidential candidates choose to crudely criticize the yuan's devaluation, it's their own motives that should be examined, not China's.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author on this story:
William Pesek at email@example.com
To contact the editor on this story:
Cameron Abadi at firstname.lastname@example.org