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China’s de facto currency devaluation last night has sent a vitally important message to the President Obama and his trade policy advisers, to a Congress that has just endorsed his strategy for handling currency issues in the proposed Pacific Rim trade deal, and to presidential contenders in both major parties. Their reactions will go far toward determining whether China’s renewed exchange-rate protectionism will further slow the already sluggish American and global economic recoveries, or worse, generate more central bank stimulus that further addicts the nation and world to unhealthy, credit-fueled growth. Indeed, downplaying and coddling a weaker yuan – which could well be cheapened further – may further widen the kinds of international economic and financial imbalances that set the stage for the last global financial crisis.

Constructively dealing with Beijing’s gambit will require correctly understanding its origins and likely effects. This latest example of currency manipulation is not mainly a Chinese attempt to regain competitiveness following the yuan’s rising exchange rate versus export-oriented Asian rivals. Taiwan, Korea, Japan, and others are also seeing their exports fall due to weakening growth in their major final-consumption markets – which are outside Asia. Indeed, China’s trade surplus year-to-date is up more than 200 percent over 2014’s absolute record level. And China’s move into higher value manufacturing – including production of previously imported components of advanced consumer electronics products it once mainly assembled – is proceeding apace.

Instead, China’s decision greatly to widen the yuan’s trading band reflects a determination to boost its economy by increasing its market share even in a world where growth has stagnated or shifted into reverse. As such it’s a quintessential example of beggar-thy-neighbor trade predation. China’s intentions should also be obvious from the devaluation’s timing – two days after the release of trade figures showing a much worse-than-expected year-on-year drop in July exports. And if Beijing really considered the global economy a win-win proposition, it would have sought to juice its own expansion by stimulating domestic demand yet again, which could have helped both foreign-based producers as well as China-based producers. Devaluation, by contrast, bolsters the latter at the former’s expense.

As a result, contrary to many optimistic interpretations, the sluggish global macro picture does not limit the devaluation’s potential to inflict damage on the United States or the rest of the world. In fact, China’s devaluation decision – which is by no means sure to stop with this initial step – arguably could destabilize global finances more dangerously than during the bubble decade. Then, the lopsided financial flows resulting from China’s massive trade surpluses with the United States provided the critical mass of cheap credit that supercharged the intertwined American housing and consumer sectors – and eventually pushed the entire world to the brink. But then, too, U.S. and global growth were stronger. And the Fed and other central banks hadn’t yet created previously undreamed of floods of credit to stave off disaster.

Yet containing the effect of China’s mercantilism this time, without yet more massive – and even reckless – U.S. debt creation, will require the kind of push-back emphatically rejected so far by President Obama and by most Congressional Republicans. Clearly influenced by multinational company interests whose China production benefits from an artificially cheap yuan and other Chinese export subsidies, America’s Democratic and Republican leaders have opposed both sanctioning currency manipulation either unilaterally or through Mr. Obama’s proposed Trans-Pacific Partnership trade agreement (TPP). But they’ve also received cover from no less than Federal Reserve Chair Janet Yellen. She has endorsed the claim that combating currency manipulation could expose the United States to international retaliation because central bank easing – like the Fed’s quantitative easing (QE) and zero interest rate (ZIRP) policies – puts downward pressure on currencies.

The aforementioned timing of China’s action, however, makes this case much harder to make. So does the now greater likelihood that an American failure to respond on either front could well flash a bright devaluation green light before other trading powers – including present and future TPP countries – thinking of continuing (as in the case of Japan) or embarking on this course. Consequently, expect greater pressure on Congress to reject any TPP emerging from ongoing negotiations that lacks strong, enforceable currency manipulation curbs.

One almost certain source of this pressure – this year’s crop of presidential candidates.

As a long-time trade policy critic, Vermont Senator Bernie Sanders seems sure to weigh in quickly on China’s decision and the TPP, and will find a receptive audience among his Capitol Hill Democratic colleagues. He and other Democrats are also bound to turn up the heat on rival White House hopeful Hillary Clinton, whose trade policy and TPP positions have been more ambiguous. After weeks of refusing to comment on the TPP – whose development she must have shaped as President Obama’s first Secretary of State – Clinton declared that a final deal must “address” currency manipulation “either directly or indirectly.” But although this statement left the presumptive Democratic nominee with lots of wiggle room, it also left this flank highly exposed.

At the same time, Congressional Democrats need to remember that currency manipulation is hardly the only protectionist policy pursued by China at the expense of domestic U.S. businesses and their employees, and that even tough currency measures in the TPP text hardly ensures solving the problem. After all, many current and prospective members (like Japan and China, respectively) have vital interests in ensuring that this option remains available. As a result, whatever the merits, they’ll be highly likely to block American currency actions in the treaty’s dispute resolution mechanism. Legislative currency sanctions supporters on both sides of the aisle, therefore, will need to press just as hard for unilateral U.S. currency responses, too.

The politics on the Republican side are clearer. Front-runner Donald Trump has blasted U.S. trade policy with China as a disaster, and has just gotten a huge supply of fresh ammunition. His GOP White House rivals have all supported these China policies with varying degrees of enthusiasm. Will they start backing off? Will they continuing ignoring the subject, even though China’s trade predation inflicts nearly all of its damage on a private sector they claim to prize? Much will depend on whether conservative talk radio and Fox News decide to give this issue any coverage – and of course on whether Trump can keep focused on this subject and stay out of personal feuds.  If he can, he could display more seriousness on critical China issues than most of the rest of the American political establishment – low bar though that is.   

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