The United States took the rare step on Monday of formally labeling China a currency manipulator, as trade relations between the two countries continued to spiral downward after President Donald Trump’s decision last week to impose additional tariffs on Chinese goods. “In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department said in a statement that followed the People’s Bank of China’s decision to let its currency, the renminbi, fall to the lowest level in more than a decade. U.S. Treasury Secretary Steven Mnuchin made the determination acting “under the auspices of President Trump,” the department said. Mnuchin will now “engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions,” it added. Previous administrations have been loath to label China a currency manipulator, arguing it was better to work with other countries to put diplomatic pressure on Beijing. The last time Treasury designated any country as a currency manipulator was in the early 1990s, when China was named. During the 2016 presidential campaign, Trump promised to formally label China as a currency manipulator on his first day in office. But he declined to do that, reflecting the prevailing view at the time that Beijing was not devaluing its currency for an unfair trade advantage. The trade tensions had already driven stocks lower Monday before the Treasury’s designation. Both the Dow Jones Industrial Average and the broader S&P 500 fell around 3 percent, extending losses from last week. Soybean prices were also under pressure at the Chicago Board of Trade.The penalties associated with the U.S.’ move include asking the IMF to increase surveillance of China’s currency practices. The United States could also deny Chinese companies access to financing from the Overseas Private Investment Corporation and prohibit them from bidding on U.S. government procurement contracts. But those do not kick until after a year under the authorizing statute. However, the Commerce Department has previously proposed treating undervalued currencies as an illegal trade subsidy. If that becomes final, Treasury’s designation could help open the floodgates to a number of trade remedies cases seeking countervailing duties on Chinese goods.
Treasury’s action “is more symbolic than anything at this point and aimed at Trump’s hard core political base that he will need to shore up now that the economy is broadly decelerating in part due to the trade conflict,”
said Joe Brusuelas, chief economist at RSM. “Moreover, it marks the start of a process that my end in the Trump administration attempting to devalue the dollar.” “China will view this as unjustified and, therefore, is likely to retaliate, thereby signaling further tension escalation,” said Mohamed A. El-Erian, chief economic adviser at Allianz. “It signals a new step in the weaponization of economic instruments, also raising the probability of both trade and currency wars.” Some feared a replay of the disastrous replay of U.S. actions under the Smoot-Hawley Tariff Act in the 1930s and tit-for-tat responses by other countries that many blame for prolonging the Great Depression. “No doubt about it: We witness the two largest economies in the world in full economic, trade, currency war and this gets worse before it stabilizes,” David Kotok, chairman and chief investment officer at Cumberland Advisors, said in an email. “Recession risk rising. Smoot-Hawley replay is now underway.”