What will Trump say about Chinese manipulation at the SOTU address?

Tonight US President Donald Trump is due to give his first state of the union address. From a foreign policy perspective, the big item on the table is Russia. But from an economic perspective, the country we meed to be thinking about is China. Here’s why.

There are a few things that matter on the economy regarding Trump’s policies. The big three are taxes, spending, and trade. We know what Trump wants to do with taxes. US Treasury Secretary Mnuchin told us he wants tax reform by August, including tax cuts for the middle class. We also know what he wants to do about spending: increase defense spending, while cutting big elsewhere. And he intends to leave social security and medicare alone. Again, Mnuchin told us this. But what about trade?

Time and again, we have heard Donald Trump say one thing and his direct reports say something of a different tenor. Invariably what we see is Trump making aggressive commentary about one country or another. And then his direct report making much more diplomatic and conciliatory noises. This was true with Mattis on NATO and Germany, with Kelly and Tillerson on Mexico and it’s also true on Mnuchin and China.

It makes you wonder if Trump is just a conventional Republican with bluster and nativism setting him apart —  or whether he really is going to dramatically shift course on the economic front. What Trump says about Russia, Mexico, illegal immigrants, the press will be pro forma Trump. But what he’s going to say about China is less clear. So Trump’s comments on China will tell us exactly how far he’s willing to go with his America First program.

Just last week, Trump called the Chinese “grand champions at manipulation of currency”. Meanwhile, Treasury Secretary Mnuchin says he’s had “very good conversations” with the Chinese on the currency issue. What’s more, for the Trump Administration to actually label China a currency manipulator, the Chinese have to fail three tests: 

• The country must have a large bilateral trade surplus with the US
• It also must have a large current account surplus 
• And finally, it must be using persistent one‐sided intervention in the foreign exchange market to keep its currency down

The Chinese only fulfil one of the three criteria – and that’s the large bilateral trade surplus with the US. The current account surplus has declined and it has done so dramatically in GDP terms.

What’s more, China has been intervening to prop UP its currency, not to hold it down. I don’t think you can call China a currency manipulator. In fact, if you had to look at manipulation, Switzerland, Germany, Japan, South Korea, and Taiwan meet two of the three criteria, while China only meets one.

So what Trump actually says at the State of the Union Address on China will be instructive regarding how much of his commentary is bluster and how much of represents actionable policy.