Trump’s shockingly traditional approach to currency policy

On Sunday, President Donald Trump offered the clearest hint as to why he had broken his key campaign promise to label China a currency manipulator: "Why would I call China a currency manipulator when they are working with us on the North Korean problem?” he tweeted. “We will see what happens!”

It’s an extraordinary message—an explicit confirmation that the U.S. may overlook currency manipulation to benefit our foreign policy interests. Whether China is actually manipulating its currency doesn’t seem to matter; it only matters that China is working with the U.S. to rein in North Korea’s nuclear program. If Beijing continues to cooperate, the tweet implies, Trump will take a more lenient stance on China’s currency policy.

Critics have seized on Trump’s tweet as selling out his supporters, saying that currency manipulation is a narrow issue, with clear definitions and consequences for violations, and shouldn’t be used as leverage for other policy goals. But presidents have never used currency policy in this way and the actual decision over labeling a country a “manipulator” has always involved political considerations. Trump, then, is simply continuing this policy—with one big change: In the past, the president has never confirmed this transactionalism. In other words, Trump is just being more honest.

To critics of traditional U.S. trade policy, Trump’s honesty is of little comfort. They had hoped that Trump would offer a decisive break from past U.S. trade policy, which has almost never labeled China, or any other country, a currency manipulator. In fact, the last time Treasury officially designated a country a currency manipulator was China in 1994, despite widespread belief among economists that China artificially held down the value of the yuan for many years since.

Why? Lori Wallach, a trade expert at Public Citizen, has a simple answer: In the U.S.-China relationship, the United States has long subjugated currency issues for other issues, such as protections of intellectual property or market access. “It was a political decision,” said Wallach about Trump’s decision not to label China a manipulator, “and it was one that the president shockingly admitted was a foreign policy trade-off, one that he attacked past presidents for making with China.” In this telling, the U.S. prioritized the economic interests of Wall Street over those of Main Street. And whenever geopolitical considerations were at stake, such as China’s aggressions in the South China Sea or its veto at the United Nations Security Council, the U.S. deprioritized currency policy even further. So, even as China depressed the value of the yuan, reducing U.S. exports and costing American jobs, Treasury never officially labeled China a currency manipulator.

Brad Setser, who worked on international issues as a senior Treasury official in the Obama administration, doesn’t exactly reject this argument, but believes it misses a key point: labeling China a currency manipulator could have undermined attempts to persuade Beijing to stop artificially holding down the value of the yuan. “There undoubtedly has been a recognition that a label could contaminate the broader relationship,” he said. “But I also think there was a specific concern that labeling China a currency manipulator might—and this is eminently debatable—impede progress on currency, particularly when China was allowing some level of appreciation.” After all, the “currency manipulator” label comes with no direct consequences, but would greatly anger the labeled country.

A former Treasury official rejected the idea that past administrations traded off currency policy for other economic or geopolitical goals. But, he said, “I’m not saying this was some pure, technical, analytical exercise that only a bunch of beanie heads were involved in because that was definitely not the case. There were political discussions and meetings going on to think through consequences but you did try to utilize the analysis as it stood to come up with your conclusions.”

Trump enters office at an even more difficult moment in the U.S.-China relationship. North Korea is rapidly developing the ability to strike the United States with a nuclear weapon and has conducted more nuclear tests since Kim Jong Un came to power. That has meant Trump’s relationship with Chinese President Xi Jinping has not been dominated by trade issues but by North Korea. In early April, Xi met with Trump in Florida and Pyongyang’s nuclear program was a top topic of conversation. And as North Korea prepared for another missile test—which failed a few seconds after launch on Saturday—Trump directed an aircraft carrier to reposition off the Korean Peninsula.

Beijing has taken some steps against North Korea, suspending coal imports from the country for 2017, cutting off a critical source of financing for the regime. Last week, a Chinese newspaper with close ties to the government suggested that “another provocation” might cause China to restrict oil imports into North Korea. But Beijing could also reverse those policies if the U.S-China relationship deteriorates on other issues, such as labeling China a currency manipulator. Even among critics of trade policy, the need for cooperation with Beijing on the issue of North Korea has some salience.

“I’m sympathetic of the idea of trying to prevent nuclear war, but I am inclined to think there are other items that we can give to China first in order to encourage their cooperation,” said Dean Baker, co-director of the Center for Economic and Policy Research who has long criticized U.S. trade policies.

There is another reason not to label China a currency manipulator: it isn’t manipulating its currency anymore. Years of negotiation and subtle pressure led to the slow appreciation of the yuan. If anything, the currency is overvalued now and China has been taking steps to prop it up. (Experts also note that China continues to hold trillions in U.S. reserves, affecting currency markets.) When Treasury released its semi-annual report on foreign exchange practices last week, China met only one of three criteria to potentially be labeled a currency manipulator. Under the Obama administration, Beijing would have been removed from Treasury’s currency “monitoring list”—a list of countries that meet two of three criteria—but the Trump administration tweaked the rules so that China remained on the list anyway.

Still, it isn’t clear that Trump believes China isn’t manipulating its currency. He told the Wall Street Journal last week that the Chinese “are not currency manipulators.” But in late February, he called Beijing the “grand champions” of currency manipulation. It’s tough to know what he actually believes—whether his policy has changed because the underlying facts no longer support it, or whether he thinks he’s bending on a principle in the interest of making a deal. His interview with the Journal suggest the latter: “Solve the problem in North Korea. That’s worth having deficits,” Trump said in the interview. “And that’s worth having not as good a trade deal as I would normally be able to make.”

When it comes to currency manipulation in Asia, a tougher case may be one of our closest allies: South Korea, which the International Monetary Fund said in its most recent assessment is undervaluing its currency and is listed on Treasury’s “monitoring list.” Many trade experts have long held that Seoul keeps the won undervalued, but Treasury hasn’t labeled South Korea a currency manipulator since 1988. As with China, the United States has a significant interest in maintaining good relations with the Koreans and a label of currency manipulation could certainly put that at risk.

Presidential candidates don’t have to balance currency policy and foreign policy; they can bash Chinese trade policies without causing a diplomatic incident. Mitt Romney and Barack Obama both were China hawks on currency issues when they ran for president. But that immediately changes once a candidate becomes president, as Trump is quickly realizing.

In a sense, Trump is actually better prepared for this shift than most new presidents. He’s taken pride in his “flexibility” on different issues and been willing to backtrack on almost any campaign promise, whether labeling China a currency manipulator or becoming more involved in the Syrian civil war. But whereas Trump’s flip-flops on most issues represent a break from past presidents, who haven’t sharply changed their positions once in office, his flexibility on currency is perfectly in line with past presidents. It’s a business-as-usual currency policy, where everything is negotiable and all issues are connected.

And to Trump, that’s exactly how policymaking should be.