By Robert Romano

“They’re not currency manipulators.”

That was President Donald Trump’s reversal in the Wall Street Journal on his campaign pledge to direct the Secretary of Treasury to label China a currency manipulator under 22 U.S.C. Section 5304(b), which provides that “If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

The change in course came as Trump met with Chinese President Xi Jinping to discuss, among other things, the emerging nuclear threat from North Korea and the potential for expanded trade relations, maybe even a trade deal.

Like so many other things, the move comes with political risks and rewards. The risks are that China is not helpful on the North Korea question and that no trade deal emerges addressing currency exchange rates and their impact on U.S.-Chinese trade.

Also, if another recession were to hit, and China were to continue devaluing the yuan against its fixed exchange rate with the dollar — cheapening its exports to the U.S. while increasing the price of U.S. exports to China — it will renew pressure to label China as a currency manipulator.

Escalating tensions with North Korea and isolating them also carries risks of being provocative. Deterrence is preferable for obvious reasons, but the downside must be considered, too.

The rewards could be cooperation in neutralizing the danger posed by North Korea, and a new trade agreement with Beijing that could bring down some of China’s non-tariff barriers including currency exchange rates.

This point needs to be considered.

Just because Trump has not decided to invoke the clause of law that allows him to label China a currency manipulator, does not mean he does not still intend to reduce China’s non-tariff barriers to trade all the same. Otherwise, why talk up a trade deal?

In a tweet on April 11, Trump signaled, “I explained to the President of China that a trade deal with the U.S. will be far better for them if they solve the North Korean problem!”

In other words, stating that, for the moment, China is not a currency manipulator is a gesture of good faith that Trump will extend a further branch on trade relations if cooperation on the North Korea question can be obtained.

But just as swift as Trump’s reversal was on the trade question, could be a reversal in the opposite direction. Trump said that, for now, the currency manipulation tactic is being ruled out. But it remains on the table, obviously, because 22 U.S.C. Section 5304(b) has not been at all repealed.

The message is that China needs to deliver.

In the meantime, if the U.S. Trade Representative is directed to negotiate a trade deal with China, you can bet currency that will still come up. Rather than punishing China on currency, Trump is creating the possibility that both sides can agree on tariff and non-tariff barriers including currency. Punitive measures may not be necessary if agreement is possible.

After all, the same section of the law, in subsection (a), provides that “the President shall seek to confer and negotiate with other countries—(1) to achieve—(B) more appropriate and sustainable levels of trade and current account balances, and exchange rates of the dollar and other currencies consistent with such balances.”

In other words, why not try to talk to China first? Why start a trade war on day one?

This is being reported, somewhat unfairly, as a broken promise. It is not.

It’s more of a gamble, but one that could pay huge rewards in the longer run. Trump is making a gamble, but not an irreversible one. Right now, Trump is speaking softly, but he still carries a big stick on trade and currency.

Robert Romano is the senior editor of Americans for Limited Government.