Economists: Trump's Charges Against China Are Obsolete

Republican presidential candidate Donald Trump's latest attack on China is about three years behind the times.

In a column in The Wall Street Journal previewing a policy paper he released Tuesday, Trump wrote that "the worst of China's sins" is manipulating its currency, the yuan, to gain an economic advantage over the United States and other countries. Citing the estimates of unidentified economists, the real-estate magnate charged that "the yuan is undervalued anywhere from 15 percent to 40 percent," giving Chinese exporters an unfair price edge in world markets.

For years, critics, including the U.S. Treasury Department, complained that China kept its currency artificially low. And until perhaps 2012, it was probably true.

But the charge appears outdated now.

The yuan has risen nearly 5 percent against the U.S. dollar over the past five years — a period during which most major currencies fell against the dollar. The rising currency reflects China's increased global clout. By May of this year, the International Monetary Fund declared the yuan "is no longer undervalued."

The Peterson Institute for International Economics publishes an interactive graphic showing which countries' currencies are out of whack with economic reality, starting with 2008. It shows the yuan being "significantly undervalued" until mid-2012 and reaching a more or less fair value last year.

"My analysis indicates that the currency has risen sufficiently that it's now no longer undervalued," said Peterson senior fellow William Cline. Charging that China is manipulating its currency is "a good talking point," Cline said, but "it's out of date."

Trump's column and policy paper on China came just before the fourth Republican presidential debate, as he continues to face pressure to fill in the broad strokes of his stated policy goals.

He has been criticizing China's currency and trade position for more than a decade. In his campaign, he continually describes the country as an enemy ruled by cunning leaders bent on stealing U.S. jobs.

"This grossly undervalued yuan gives Chinese exporters a huge advantage while imposing the equivalent of a heavy tariff on U.S. exports to China," says his policy paper. "Such currency manipulation, in concert with China's other unfair practices, has resulted in chronic U.S. trade deficits, a severe weakening of the U.S. manufacturing base and the loss of tens of millions of American jobs."

But the rising yuan has eroded China's economic advantage over the rest of the world. In 2007, for instance, China was running a trade surplus equal to 10 percent of its gross domestic product — the broadest measure of economic output. By 2013, its trade surplus was down to 1.9 percent of GDP, according to the World Bank.

China is attempting to move its economy, the world's second biggest, away from dependence on exports and often-wasteful investments in real estate, factories and infrastructure projects such as high-speed rail lines. Instead, it is seeking slower, steadier growth built on spending by China's growing middle class.

A stronger currency makes it easier for those consumers to buy foreign goods.

But China's economy is slowing as it makes the transition: It is expected to expand 6.8 percent this year —enviable growth for the mature economies of the United States and Europe but the slowest for China since 1990.

To be sure, China is still on track to run a record trade surplus with the United States this year. But Eswar Prasad, Cornell University professor of trade policy, said "this is because the U.S. economy is strengthening" by pulling in more imports while "China's imports have fallen sharply due to weak economic growth as well as the decline in oil and other commodity prices."

Trump's column and policy paper go into much more detail than he has in the past, but did not impress Yukon Huang, senior associate at the Asia program at the Carnegie Endowment for International Peace. He said Trump's views flunk Economics 101. "China's currency is either about right or possibly overvalued and needs to depreciate," Huang said.