Trump is about to hand China a lovely present

Reuters

Donald Trump has said a lot about how he plans to punish China as president, with some of the ideas more likely to happen than others.

The most likely policy to pass is the defeat of the Trans-Pacific Partnership trade agreement, but if that happens, Trump would actually be handing China a massive gift.

In fact, there are few things China wants more from America.

As Societe Generale analyst Wei Yao put it in a recent note to clients, "one upside to China under the Trump administration, in relative to the Obama administration, is that the Trans-Pacific Partnership (TPP) free-trade pact — which excluded China — looks more certainly doomed."

The TPP is a trade agreement among 12 Pacific Rim countries that includes the US but excludes China. If it doesn't pass, China would have an opportunity to fill a vacuum left by the US. The most likely vehicle for that would be China's "One Belt, One Road" initiative, which seeks to create partnerships to build infrastructure and trade with the country's continental neighbors.

And then there's the stuff that probably won't happen (most of the stuff)

The rest of Trump's China policy is harder to pull off but would be similarly likely to negatively affect the US economy.

Trump, who is set to be sworn into office on January 20, has promised to label China a "currency manipulator" on day one. He has long accused the country of keeping its currency, called the yuan or the renminbi, artificially low so that it can sell more exports.

The problem with that is there are measurable criteria a country must meet for the Treasury to classify it that way (yes, Walter, this is not 'Nam, there are rules).

Here are the criteria that must be met for a country to be considered a currency manipulator:

• 1) a significant bilateral trade surplus with the US;
• 2) a material current account surplus (>3% of GDP); and
• 3) persistent one-sided intervention in its currency market.

China meets only the first criterion. It does not fit the second, and as for the third, the country is doing the opposite.

Even though the yuan is hitting six-year lows against the US dollar, China is actually trying to stop its currency from falling faster. It has been quite a costly effort too, but it's worth it when considering the country's ultimate goals.

China wants to keep the yuan strong because it is trying to move its economy from one dependent on selling exports to one driven by the purchasing power of its own people. For the country to succeed in that endeavor the people need to have a currency strong enough to buy all kinds of goods, foreign and domestic.

Reuters

We should also note that China was labeled a currency manipulator from 1992 to 1994, and you know what that did to the country?

A steaming hot pile of nothing.

The other thing Trump has suggested is putting a high tariff on goods made in China — something like 45%. All this would end up doing is making goods more expensive for Americans. This is something a Republican-controlled Congress — much of it still in favor of free trade — would have to pass. In that sense, it's not looking good for this campaign promise.

A tariff has geopolitical implications too. It could also actually help China's leaders politically, according to Yao of Societe Generale. That's because Trump's policies, in the face of a slowing economy, could be used as a measure to stoke nationalism and place blame on the US rather than on China's government. This is a move the Obama administration has been careful to avoid.

Chinese leaders and the propaganda machines they control have actually already started using Trump to push a nationalist agenda. Even before he won, outlets like People's Daily were saying the US election's tenor proved that it was a "sick" democracy.

And by the way, we've tried this stuff

For what it's worth, we already do punish China for violating trade agreements — the Obama administration brought 11 of the 19 suits against China with the World Trade Organization, for example — but the results aren't always what we expect.

Take what has been going on with Chinese steel, for example. To keep its slowing economy going and keep people employed, China has been flooding the global market with cheap steel, despite promises to cut excess capacity.

The US, in turn, has slapped tariffs of 500% on Chinese steel. That has had unintended consequences on our manufacturers who buy that steel. As such, demand is slowing in the US.

The Australian bank Macquarie pointed this out in a note a few months ago.

"While output has been carefully managed by US producers to help maintain the tariff-driven price premium over other regions, apparent demand is clearly not good at -10% YoY over 2016 to date," analysts wrote, adding (emphasis ours): "While destocking can explain part of this, we would reiterate our concern that higher steel prices are hurting US manufacturing competitiveness (and thus steel demand). As our recent note showed, the US is the biggest negative drag on global industrial production at the present time."

And manufacturers that have to buy steel have been vocal about this.

"There's grumbling that the US mills are taking advantage of a tight market, and the price hikes are too much, too fast," Lisa Goldenberg, the president of Delaware Steel Co. of Pennsylvania, a steel trading and processing company, told The Wall Street Journal.

Remember, if steel costs more, someone has to pay for it. And that someone is you, America.

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