One of Donald Trump’s more frightening election campaign promises was to declare China a currency manipulator and instigate punitive tariffs against Chinese imports to America.
Now, I’m not an economist (my Masters degree in Economics at the University of New England was awarded by mistake) but to me, this particular threat is perhaps one of the most scary that he has made.
One of the more bizarre aspects about Donald Trump is that he does not understand all actions have equal and opposite reactions. In Systems Theory, we called this feedback. The Trumpster does not believe in feedback. He believes that he can do what he likes and there will be no consequences.
Unfortunately, the result of the US presidential elections will only have reinforced this view.
Nonetheless, instigating tariffs against Chinese imports will produce a reaction from China and, knowing the Chinese, probably a disproportionately strong reaction. It will also create reactions all round the world, the consequences of which Trump probably does not understand and much less considered.
Donald Trump indicates his understanding of international trade and economics
In recent years, the US Administration and Federal Reserve have engaged in what is known as “Quantitative Easing” which is a monetary policy that effectively devalues country’s currency against that of its trading partners.
An article Quantitative Easing vs. Currency Manipulation, Investopedia on Facebook explains the difference (or lack thereof).
If making exports more competitive through a devaluation of the currency is evidence of currency manipulation, then you could level a similar criticism against the United States for lowering the federal funds rate and the subsequent quantitative easing programs following the 2008 global financial crisis. Both tactics put downward pressure on the dollar and consequently the exchange rate, making U.S. exports more attractive against international competitors.
The effect is to make the quantitative easer’s exports less expensive while making their trading partners more expensive. Effectively, it means that large, economically powerful countries like the US can solve their financial problems by making other people pay for them.
This is what China and the US have both been doing. There is a difference in that the Chinese yuan is not floated like the $US and the $A. Many market analysts believe that the Chinese actions are simply bringing the currency back closer to true market value. Levelling the playing field if you like.
Nonetheless and regardless of what you call it, both Quantitative Easing and Currency Manipulation are monetary policies that both China and the US have used and certainly will use in future.
Ranting against the Chinese may go down well with the domestic electorate but it demonstrates a fundamental lack of understanding about international economics and trade.
A lot has been written about President-elect Trump’s character failings. The worry is that they pale into insignificance against his ignorance of economics, fiscal and monetary policy.