How China’s currency move shows the limits of White House influence

By Danny Vinik

On Tuesday, the People’s Bank of China devalued its currency by 2 percent, a major change that roiled markets and was the topic of the day on Wall Street.
The timing took even veteran currency-watchers by surprise, though it makes sense for China: Ever since its stock market crashed over the past few months, China has been seeking ways to keep its economy growing strongly, and a cheaper currency is one way to improve its companies’ competitiveness.

So far analysts have focused on what this means to the Chinese economy. But the move also matters to the U.S. — not least as a signal that the White House has less influence on Chinese currency policy than it likes to claim.
Just a couple of months ago, the threat of currency manipulation was a big stumbling block for the Trans-Pacific Partnership, the huge trade deal Obama is trying to close this year. Lawmakers like Rep. Sander Levin (D-Mich.), Sen. Sherrod Brown (D-Ohio) and Sen. Rob Portman (R-Ohio) insisted that the deal should include enforceable language to prevent TPP countries from manipulating their currency. (China is not part of the TPP but could be added to it in the future.)
The White House argued that any currency chapter acceptable to other TPP countries would infringe on America’s own monetary policy. They also implied it wasn’t necessary, and said things like this:
“Some countries, they try to lower their currency so that it makes their goods cheaper, makes our more expensive. There was a time when China was pretty egregious about this. When I came into office, I started pounding on them. Every time I meet with them, I’d be talking about currency. And we pushed back hard, and China moved. In real terms, their currency has appreciated about 30 percent since I came into office. And we’re going to keep on going after it.”
That’s President Obama in May, when he delivered a speech at Nike’s headquarters to promote the TPP.
His implication was that the White House’s strategy has been successful. Today’s move suggests that his strategy is not as powerful as he thinks.
In its response, the administration framed this as potentially all part of the plan. The People’s Bank of China called Tuesday’s action a “one-time depreciation,” and a U.S. Treasury spokesperson expressed hope that this was the case: “China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate.”
Critics of the White House’s position have a less charitable view. “There is reason to be skeptical of believing that the largest devaluation of the Chinese currency in over two decades is merely about moving to a market-based exchange rate,” Rep. Levin said in a statement.
More importantly, the critics say, neither the White House nor its critics know the actual goal of Chinese authorities. And that alone, they say, is the reason the U.S. still needs a clear plan to combat currency manipulators, such as imposing tariffs on countries that Treasury deems to manipulate their currencies.
“It certainly takes away the argument that China no longer manages their currency or that it’s not misaligned,” said Jared Bernstein, the former chief economist to Vice President Joe Biden. “It’s also a reminder that whatever happens with the TPP, we need a strategy to deal with this tactic.”