December 05, 2019
For the moment, the US trade war with China has shifted focus from stealing US intellectual property back to the value of its currency, with the Trump administration renewing its old charge of manipulation — deliberately devaluing its currency to give its products an advantage in international trade.
Dean Baker has written several recent articles on US-China trade and why the value of China’s currency matters. This seems like a good time to revisit some important points Baker makes on this topic.
The Role of China’s Currency Value in US Trade Deficits
Baker explains: “China’s holdings of excess foreign reserves keeps down the value of its currency relative to the dollar and other currencies.”
In fact, China is holding “…well in excess of $3 trillion worth of dollar denominated assets. Its decision to hold a massive stock of dollar assets depresses the value of the Chinese yuan against the dollar, thereby maintaining the competitive advantage from a lower-valued currency.”
Baker also illustrates how the US manages its currency, writing, “This is similar to the story of the Federal Reserve Board’s holding of assets. While the Fed long ago ended its quantitative easing program, which involved buying assets, it continues to hold more than $3 trillion in assets, which most economists agree is a factor keeping down long-term interest rates.”
About the Sudden Drop in the Yuan
Baker puts into context this week’s devaluation of the yuan, writing, “The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large, single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.”
What’s at Stake for US Workers?
Baker sums it up: “If Trump focused on currency, he would likely be able to reach an agreement with China, which would reduce its trade surplus with the United States. This would create more jobs for US manufacturing workers, which would likely be a boost to the large segment of the work force without college degrees (roughly two-thirds).”