Donald Trump and China in Four Points

According to Donald Trump, China is “one of the greatest thieves of all time.” Why? Because apparently, China manipulates its currency.

Allegedly, the Chinese government keeps the exchange rate for Chinese currency artificially low, which has allowed Chinese companies to take over the U.S. market with their products. As usual, Trump asks the right questions. As usual, his statements spread across the world. As usual, his critique lacked any depth, and that’s the least we can say.

Why Exactly Is Trump Criticizing China?

Trump is outraged by the trade deficit between China and the United States. In 2015, that deficit was $365.7 billion. Trump is right to denounce the weak exchange rate of the American dollar against the Chinese yuan. In 1989, $1 was worth 8.5 yuan. Today, $1 is worth 6.5 yuan. The Chinese currency’s value grew by 25 percent in 25 years compared to the U.S. dollar. Several international experts, like those from the International Monetary Fund, believe that this increase is due to the growth of the Chinese economy, thus the Chinese government has not been manipulating the yuan’s exchange rate.

Why Haven’t the Arguments of International Experts Been More Convincing?

The problem is that during those 25 years, the Chinese economy grew 24 times. But during that same period, the value of the U.S. economy only tripled. Today, the Chinese economy is worth $11 trillion, and the U.S economy is worth $18 trillion. Considering the size and growth rate of the Chinese economy, the yuan should be worth a lot more.

Why Has the Chinese Government Been Preventing the Yuan from Increasing in Value?

The Chinese government is not letting the yuan increase in value for several reasons. First, the price of natural resources is low, and China imports an enormous amount of raw materials. A strong yuan would not be beneficial. Second, China exports a lot of manufactured goods. Because of this, a weak yuan is a plus. Additionally, if the yuan’s value increased suddenly, the country would face capital flight, as many Chinese want to invest abroad.

Is Trump Right When He Says that the United States Has the Upper Hand?

Trump overestimates the importance of trade between the U.S. and China. Only 17 percent of Chinese imports head to the United States. And China is becoming less and less dependent on exports to grow its economy. The real problem is the general decrease in U.S. competitiveness. China is but one of many examples of this reduced competitiveness, even if the yuan probably is highly undervalued. In short, it’s unlikely that the U.S. government is strong enough to strong-arm the Chinese government.