AgSplainer on Currency Manipulator
Apr 24, 2017
This week, the Trump administration surprised many observers including me by declining to declare China a currency manipulator. This is one of those policies that we all think we kind of understand but probably don't, so here's an AgSplainer.
The term currency manipulator is an official designation from the Treasury Department that a country is rigging the markets for its currency. The guideline is spending over 2% of GDP - economic output - buying other currencies and selling their own.
This drives down the value of their currency and makes exports from their country cheaper, but imports more expensive. Manipulating currency creates winners and losers at home.
President Trump had promised to declare China a currency manipulator multiple times during the election campaign, even though China since 2014 has been selling its massive hoard of dollars to increase the value of the yuan - not lower it. You can see that on this graph of their foreign reserve holdings.
Regardless, according to the Currency Act of 2015, once the Treasury Department declares a country a manipulator during its annual review, it can place 25% tariffs on goods from that country after a year of negotiations to resolve the problem.
But the President already possesses the power to enact tariffs on his own, so the designation is largely symbolic. That said, countries can be extremely sensitive to symbolic acts, especially China.
Obviously avoiding unneeded trade friction with China is good for many sectors of ag, especially proteins and soybeans, so this development seems to be a step in the right direction.
On the other hand, industries like manufacturing that were counting on a tougher trade policy from the new administration are less pleased.