For years, China pretty clearly manipulated its currency to gain an advantage over global competitors. It bought foreign currencies, the U.S. dollar in particular, to push them higher against the yuan. As it did, it accumulated vast foreign currency reserves — nearly $4 trillion worth by mid-2014.
But now the Chinese economy is slowing, and Chinese companies and individuals have begun to invest more heavily outside the country. As their money leaves China, it puts downward pressure on the yuan.
The yuan has dropped nearly 7 percent against the dollar so far this year. The Chinese government has responded by draining its foreign exchange reserves to buy yuan, hoping to slow the currency's fall. China's reserves have dropped by $279 billion this year to $3.05 trillion.
If Beijing stepped back and let market forces determine the yuan's level, it likely would fall even faster, giving Chinese exporters even more of a competitive edge.
So Beijing is doing the opposite of what Trump says it's doing. Cornell University economist Eswar Prasad earlier this month called Trump's plans to name China a currency manipulator "unmoored from reality."
"The whole discussion is ironic," said David Dollar, senior fellow at the Brookings Institution and a former official at the World Bank and U.S. Treasury Department. "It's out of date."
Gary Hufbauer, an expert on trade law at the Peterson Institute for International Economics, notes that as president, Trump could nonetheless escalate any dispute over the currency on his own. Over the years, Congress has ceded the president broad authority to impose trade sanctions. Trump has threatened to slap a 45 percent tax, or tariff, on Chinese imports to punish it for unfair trade practices, including alleged currency manipulation.
Brookings' Dollar said China likely would bring a case to the World Trade Organization "against any protectionist measures that are a violation of U.S. commitments to the WTO," which oversees the rules of global commerce and rules on trade disputes.
Some trade analysts wonder if Trump is using the tariff threat as a negotiating tool to win concessions from China.
Whatever the U.S. motive, China has a consistent record of retaliating against trade sanctions. When the Obama administration slapped tariffs on Chinese tire imports in 2009, for instance, China lashed back by imposing a tax on U.S. chicken parts.
China's Global Times newspaper, published by the ruling Communist Party's People's Daily, has already speculated that "China will take a tit-for-tat approach" if Trump's tariffs are enacted. The paper suggested that Beijing might limit sales of Apple iPhones and Boeing jetliners in China.
"The Chinese are predictable and reliable," DeBusk said. "If they get punched, they punch back."
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