Donald Trump is talking a lot about China. His central claim is that that the Chinese government continues to manipulate the value of its currency, keeping it low and enabling Chinese companies to export their products at lower costs than competitors in the US or other parts of the world. Is he correct?
When Trump made this claim as a presidential candidate several months ago, “fact checkers” rebuked him, citing economic reports that the Chinese currency (RMB) is now fairly valued relative to the US dollar. But the Chinese government pegs the value of the RMB in great part to that of the US dollar and reserves the right to inflate or deflate this value on a daily basis. If—as these economists claim—it is obvious that the RMB is not undervalued, and if the Chinese government is really committed to a market-based exchange rate, it would simply allow the value of the currency to float with the market. It’s like someone from the US Postal Service claiming that the private sector couldn’t deliver a letter for less than 49 cents. If so, then why maintain laws prohibiting the private sector from giving it a try?
There’s an interesting irony here. If the Trump critics were correct at the time when they claimed that the RMB was valued accurately, then the currency is now undervalued due to two significant devaluations made by the government during the Chinese market meltdown last week. I believe the Chinese currency is still undervalued but I am guessing. The truth is that we can’t know for sure without letting the market decide. The beauty of a market system is that prices will set automatically and will accurately reflect market value. An exchange rate is nothing more than a price for a currency. This debate would resolve itself if the Chinese government allows the RMB to trade freely on global markets.
So when it comes to currency valuation, Donald Trump is entirely correct. But he also refers to a need to “decouple” economically from the Chinese. Here I believe he is right again, but only to a point.
History, economics, and market logic tell us that free global trade benefits all partners. Artificially reducing trade between the US and China would have economic costs. If this is what Trump means by decoupling, then he’s incorrect.
But it is clear, however, that the US has mismanaged both its own economy and the US-Sino relationship. The Fed’s overbearing influence on interest rates and financial markets makes it difficult for US negotiators to argue with straight face that the Chinese government should leave its markets alone. US government subsidies also pick winners and losers, and our massive debt has given the Chinese an opportunity to invest heavily in the US dollar. US negotiators should have been clear about the currency manipulation issue years ago, but they bought the argument that a weak RMB was necessary and appropriate for Chinese development. In this respect, the relationship with China is skewed. We need to clean up our own house fiscally and then—from a position of strength—insist that the Chinese do likewise. To the extent that Trump is suggesting this type of reboot, he is correct.
For the record, I am not endorsing Donald Trump or any candidate for President at this point. Many of you know that I like Rand Paul a lot, but he has struggled to package his ideas effectively. Trump has clearly changed the rules of the game and I’m glad that he is running, however. His candor is a breath of fresh air, but there’s still a long way to go.
TRUMP is 100% right about China. They’re stealing our jobs. It’s time we get serious.
Donald Trump is not a conservative. I like some of the things he says, but he’s NOT a conservative. He should run as a democrat.
So he’s not pure, but he’s a fighter and he’s right on immigration. He’ll actually do something as a republication if he gets elected.
Trump has been good for the process but I don’t think he will be good for the nation if he wins. He is the most left of the 11 that were on the stage last night and I will not support a man that praised the SCOTUS Keno decision. Lets be quite frank here, “The Donald” is in this for “The Donald”.
Thank you for your assessment of the situation. I agree 100% we need to clean our own house before pointing out someone elses dirty dishes.
In your next-to-last paragraph you refer to the “Fed’s overbearing influence on interest rates and financial markets…” I refer you to a paper by Eugene Fama “Does the Fed Control Interest Rates” where he argues that it’s not all that clear that the Fed has “overbearing influence” on interest rates. An exception to that general conclusion is the period after 2008. Despite massive injections of short-term debt by the Fed, short-term interest rates, instead of rising, fell and eventually hit near zero. This, Fama argues, is pretty persuasive evidence that rates were being driven by market forces and the Fed had little or no effect.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124039
I’m familiar with Fama’s work, but you need to take it in context. It’s possible that the Fed’s control of interest rates is close to what the market would yield anyway in some instances, but there’s a technical problem with this type of analysis. The Fed not only sets rates, but also influences economic activity (and in my view, triggers the boom and bust cycle). The very market he is using as a comparison point is heavily influenced by Fed activity in the first place. In a practical sense, it’s also difficult to fathom how we would have current rates without the Fed. Even most pro-Fed economists recognize that the Fed rate differs from the would-be market rate. This is why the Fed has this power in the first place. It seeks to artificially raise or lower rates to encourage/discourage economic activity as a means of dealing with inflation/recessions.