During the Republican presidential debate on Nov. 10, moments after Donald Trump blasted the Trans-Pacific Partnership (TPP) as "a deal that was designed for China" to "totally take advantage of everyone," Sen. Rand Paul of Kentucky drew laughs from the crowd when he pointed out that, actually, China isn't even party to the deal. It was a light moment, but it underscored a reoccurring theme in the 2016 election cycle: Trump likes to bring up China – a lot.
Specifically, Trump likes to point out that China manipulates the value of its currency, the renminbi (although Trump normally refers to the yuan, the basic unit of the renminbi). Trump claims that China – along with other countries such as India, Japan and Mexico – artificially drives down its currency's value, making its exports more attractive in international markets.
Trump is far from the first to object to China's handling of the renminbi. In the lead-up to the 2012 election, both Republican nominee Mitt Romney and President Barack Obama criticized China's devaluations. While in office, former President George W. Bush openly called for China to "let its currency float" and end price fixing (China did de-peg in mid-2005). In the 2016 election, Democratic candidate Sen. Bernie Sanders joins Trump as a vocal critic of Chinese trade policy.
Currency manipulation has been part of international trade for a long time. However, economists disagree about whether it's an effective tactic.
Currency Wars
Chinese goods are priced in renminbi, not dollars or euros or yen. If the value of the renminbi drops relative to other currencies then foreign buyers can buy more renminbi and, therefore, purchase more Chinese goods. This means more business for Chinese producers and more jobs for Chinese workers in those industries.
On the flip side, Chinese consumers see all of their prices rise, especially for foreign goods. American and Japanese products are now extra expensive. All else being equal, China should see an increase in exports and a decrease in imports.
Candidates such as Trump and Sen. Sanders are concerned about the impact on the U.S. manufacturing sector, which has seen fairly steady job losses since the early 1980s.
Is the Renminbi Undervalued?
If China is attempting to ruin the value of its currency to compete against the U.S. dollar, it's been doing a terrible job for the last 10 years. Between 2005 and 2015 – the era of a de-pegged Chinese currency – the renminbi appreciated far faster than the U.S. dollar, the euro or the yen. In fact, the renminbi gained by more than 30% against the dollar during that decade.
In March 2015, the International Monetary Fund (IMF) officially declared the renminbi "no longer undervalued." Freya Beamish, international economist at Lombard Street Research, suggested as early as December 2014 that the renminbi was actually "about 30% overvalued." This sentiment was echoed many times in 2015, including in a SeekingAlpha report appearing on NASDAQ's website that concluded that the renminbi was "overvalued by a decent margin."
Is Trump Right?
Trump isn't right, but his thinking is understandable.
Trump sees international economics as a win/lose proposition: one country's gain directly correlates to another country's loss. Trump blames cheap Chinese products for stock market turmoil in the United States and for robbing American workers of jobs because domestic companies can't sell enough goods. He wants to fix this by applying tariffs to foreign imports to the U.S.
The renminbi probably isn't undervalued, but Trump's sentiments would be questionable even if it were. Cheaper Chinese products may hurt those in U.S. manufacturing or textile sectors, but they are a windfall for all American consumers, who save money on their purchases that they can otherwise save, invest or spend on other goods. Lower prices directly improve the standard of living for Americans. Simultaneously, Chinese citizens have a harder time buying their own products. Their standards of living decline, outside of those who receive relatively larger wage increases working in textiles or manufacturing.
And finally, the fastest killer of U.S. manufacturing jobs just might be the ever-rising technology sector. The rate of U.S. manufacturing job losses exploded in the late 1990s and early 2000s; America was then able to import relatively less efficient products (manufacturing) and focus on a much more competitive industry.
