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With reference to US-China economic relations, explain currency manipu...

  Jan 25, 2017

With reference to US-China economic relations, explain currency manipulation and trade war.

When China's yuan falls against the U.S. dollar, Chinese products become cheaper in the U.S. market and American products become more costly in China.So the U.S. Treasury Department monitors China for signs it is manipulating the yuan lower. Treasury has guidelines for putting countries on its currency blacklist. They must, for example, have spent the equivalent of 2 percent of their economic output over a year buying foreign currencies in an attempt to drive those currencies up and their own currencies down. Treasury hasn't declared China a currency manipulator since 1994. For years, China 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 in 2016. 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 .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 impose a 45 percent tax, or tariff, on Chinese imports to punish it for unfair trade practices, including alleged currency manipulation. China can retaliate and that will cause a trade war- tit for tat. China  is likely to bring the case to the World Trade Organization against any protectionist measures that are a violation of U.S. commitments to the WTO.