Trump’s China deal is a gift to Wall Street and Beijing
Donald Trump likes to talk tough on China. And he believes his new, preliminary agreement with Beijing will yield great benefits for U.S. farmers, producers and other exporters. But to paraphrase one analyst, his deal may not amount to more than a hill of soybeans.
Last week, Trump announced plans to sign a “phase one” agreement with China on January 15. Ahead of the announcement, Trump agreed to suspend new tariffs of $160 billion on cellphones, laptops and other high-tech products.
There are two major problems with the new agreement. First, it assumes Beijing will suddenly obey trade rules and commitments it has never previously respected. Second, it provides extremely unfavorable terms for the United States on currency exchange rates.
Under the agreement, the United States would reduce some tariffs in exchange for increased Chinese purchases of U.S. farm exports. China would also commit to halting intellectual property theft. Both sides would agree not to “manipulate” their currencies. And the two countries would reportedly accept an exchange rate of seven Chinese yuan to one U.S. dollar.
These are very lopsided terms. Yes, China’s theft of intellectual property is hurting multinationals. But Trump is mistaken in seeking stronger patent and copyright protections for U.S. firms investing in China. Assuring the security of their intellectual property would simply make China safer for more offshoring. And that could help more U.S. firms move offshore, and cost even more American jobs — hardly in the interest of America’s workers and manufacturers.
More egregious are the deal’s currency provisions. A decade ago, the United States was rightly concerned about China’s currency manipulation. But in the past five years, the United States has faced a different challenge — private investors bidding up the dollar. Since mid-2014, the U.S. dollar has climbed 20 percent in value, including 7 percent since March 2018 alone.
An overvalued dollar makes imports cheaper in the U.S. market. And it makes American-made goods more expensive for overseas consumers. It explains why, even with draconian tariffs on Chinese imports, the U.S. goods trade deficit continues to climb, setting a new record of $887 billion in 2018.
The dollar’s recent rise has been driven primarily by a massive influx of private foreign capital flowing into America’s financial markets. Foreign investors have also been attracted by Trump’s huge corporate tax cut, which has inflated stock prices. And then there’s the Fed’s decision to raise interest rates starting in 2015. The Fed has now pulled back, but its three cuts in 2019 have yet to lower the dollar.
The dollar is now overvalued by an estimated 25 to 30 percent above trade-balancing exchange rates. That makes the 7:1 yuan-to-dollar exchange rate Trump accepted just laughable. In order to balance trade with China, it’s projected that the United States would need an exchange rate of 4.5 to 1. That means the yuan must appreciate by more than 50 percent to eliminate China’s persistent trade advantage. If Trump accepts a 7:1 exchange rate, he’ll be locking in future trade surpluses for China.
By agreeing to such unfavorable exchange rates, and also promising not to “manipulate” the dollar, Trump is giving Beijing a blank check. The United States simply can’t know the right trade-balancing exchange rate in five or 10 years. Setting a specific exchange rate now is naïve and shortsighted.
It appears that Wall Street – along with its various alums at Treasury, the National Economic Council and the U.S. trade representative’s office – have sandbagged the president. They’ve guided him to a deal that would tie his hands on currency. Under U.S. law, the president already possesses executive authority to realign the dollar — something President Nixon did in 1973 and President Reagan accomplished in 1985. If Trump signs a pledge not to adjust currency, he could be cutting off his own best option for dollar realignment — and regaining some of the 3.4 million jobs lost to China between 2001 and 2017.
Addressing currency misalignment is the only realistic path to effectively rebalance U.S. trade flows. Some in Congress already grasp this. Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) have introduced bipartisan legislation empowering the Fed to tax foreign purchases of U.S. financial assets. That could slow the influx of foreign capital investment currently driving the dollar upward, and gradually realign it.
Unfortunately, the current China deal could render options like Baldwin-Hawley moot if it prohibits currency realignment.
It’s time for Trump to negotiate a trade deal that will help American workers and Main Street manufacturers — and not his Wall Street cronies. He needs to reboot with Beijing and make clear that any agreements on currency would apply only to countries running significant trade surpluses. And he should immediately delete any provisions for a specific exchange rate.
Trump’s negotiations with Beijing are flawed and he needs to reject the corporate agenda being pushed by Wall Street advisers in his administration. If he truly wants to confront China to help America’s workers, the current deal is the wrong way to go.
Robert E. Scott is a senior economist with the Economic Policy Institute (EPI).