President-elect Trump has pledged to officially label China a “currency manipulator.” Does this claim hold? What will happen if Trump brands China a “manipulator”? We need to look to history for hints.

China currently meets one of the three criteria of “currency manipulation” and remains on the US Treasury’s Monitoring List. The Treasury started to use the following criteria this year:

a significant trade surplus with the US: >US$20bn

a material current account surplus: >3% of GDP

persistent, one-sided intervention: net FX purchases, conducted repeatedly, >2% of GDP over a 12M period

China’s bilateral trade surplus with the US was US$356.1bn in the 12M period through June 2016, exceeding the first threshold. As a result, in the recent review, China was included in the Monitoring List, along with Japan, Korea, Taiwan, Germany, and Switzerland.

In history, the alleged “manipulators” typically took action to revalue their currency or narrow the trade surplus with the US. The US Treasury started to conduct a semiannual review of exchange rate policies of its major trading partners in 1988, with Korea and Taiwan being the first designated “manipulators.” The Treasury subsequently initiated bilateral negotiations with them. Korea and Taiwan not only allowed nominal appreciation of their currencies but also agreed to reform their exchange rate systems and reduce capital controls. After a substantial currency appreciation and/or trade surplus reduction, they were removed from the roll of accused.

The US labeled China a “manipulator” from 1992 through 1994. Although the RMB continued to depreciate and China’s trade surplus with the US widened further, China did issue new regulations to allow FX purchases for trade-related transactions as a response. The US joined the WTO in 1994 and agreed to resolve trade disputes through the WTO. It has not deemed any country a “manipulator” since, but its voice against China’s exchange rate policy has never ceased.

Technically, China does not seem to qualify for “currency manipulation,” but may remain on the Monitoring List. By labeling China a “manipulator,” Trump might be able to impose tariffs on Chinese imports. However, singling out China will overthrow the established assessment framework and the long tradition of solving currency disputes through bilateral engagement. It might also lead to trade retaliation from China.

Facing external pressures, China should refocus on domestic demand for growth stabilization. Whether or not Trump will declare China a “manipulator”, it is clear that China’s wide trade surplus with the US is a source of concern. The pushback highlights the importance for China to push forward structural reforms and strengthen domestic demand.