The White House is developing a plan to discourage China from undervaluing the yuan, the Wall Street Journal reported on Monday.
According to the plan, US Secretary of Commerce Wilbur Ross would designate the practice of currency manipulation as an unfair subsidy when employed by any country. In this way, the US aims to avoid a direct confrontation with China.
The plan is a somewhat softer implementation of Donald Trump's pre-election rhetoric, in which he attacked China for perceived currency manipulation.
Trump repeatedly accused China of "killing" the US on trade by manipulating its currency to make its exports more competitive in the global market.
"We can't continue to allow China to rape our country, and that's what they're doing," Trump told a campaign rally in Indiana in May 2016.
"This has a long way to travel, but it's the beginning of what might be a conflict over currency values," Hufbauer said.
"Defining currency manipulation is not easy, and assessing how much currency manipulation amounts to a subsidy is another difficult question and if the US does this on its own, without some sort of international agreement on what the appropriate definition is and how you go about measuring the subsidy, there is sure to be controversy and conflict over the practice."
A trade conflict between China and the US is unlikely to develop into a full-blown trade war, but "trade friction" is likely, Hufbauer said.
"I think there'll be a great many trade cases involving China, including [with respect to] this currency manipulation area. I don't think it will erupt into a full-fledged trade war, but a lot of trade skirmishes, a lot of friction looks like the path the administration is prepared to pursue."
In another twist, the IMF and other international observers have found no evidence that China is actually undervaluing the yuan at the current time.
"Today, what the Chinese authorities are doing, is actually buying renminbi, they're trying to prop up its value. That's exactly the opposite of what's being asserted in Washington. So, all in all there are a lot of curious twists in this case."
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