US appoints itself prosecutor, judge and jury on currency manipulation
Hillary Clinton, the frontrunner for the Democratic Party nomination in this year’s US presidential election, repeated her opposition on May 1 to the proposed Trans-Pacific Partnership trade deal, while Donald Trump, leading the Republican Party’s nomination race, called the US trade deficit with China “the biggest theft in history”.
While a lot of words get thrown about in the hurly-burly of the US electoral process, and much of the rhetoric remains just that, policymakers and investors in Asia, and indeed in Europe, cannot just ignore the tone of the conversation being held in the United States, particularly when the US Treasury is also now weighing into the argument.
April 29 saw the publication of the US Treasury’s semi-annual Report to Congress on the Foreign Exchange Polices of Major Partners of the United States and unveiled a new watch list of economies whose currency policies would be scrutinised for evidence that they unfairly disadvantage US producers.
“The [US] Treasury is creating a new ’Monitoring List’ that includes these economies: China, Japan, Korea, Taiwan and Germany,” said the report, applying “the intensified evaluation provisions of the Trade Facilitation and Trade Enforcement Act of 2015”.
That Act “establishes a process to monitor key indicators related to foreign exchange operations, engage economies that may be pursuing unfair practices, and impose meaningful penalties on economies that fail to adopt appropriate policies”.
While this would occur within the framework of US international obligations, those countries on the watch list might reasonably conclude Washington has appointed itself prosecutor, judge and jury where the accused are essentially being investigated due to their success in exporting goods to the United States.
Penalties imposed by one side would invite equivalent retaliatory action and so undermine the process of globalisation that has been broadly beneficial to US consumers and has underpinned the rise in per capita incomes in Asia’s economies.
It would also specifically have a negative impact on Hong Kong which thrives on free trade.
The US Treasury will “undertake an enhanced analysis of exchange rates and export-oriented policies for each major trading partner that has: (1) a significant bilateral trade surplus with the United States; (2) a material current account surplus; and (3) engaged in persistent one-sided intervention in the foreign exchange market.”
Currently the US Treasury has identified China, Germany, Japan and Korea as having material current account surpluses combined with a significant bilateral trade surplus with the United States while “Taiwan is identified as a result of its material current account surplus and its persistent, one-sided intervention in foreign exchange markets”.
If any economy is deemed to meet all three criteria, the United States will commence bilateral negotiations with that country and if US concerns are not assuaged after 12 months of discussion, the US president is, though a waiver may be employed, required to adopt measures that will lead to “remedial action”.
The US Treasury report goes into some detail to explain how the watch-listed economies can help themselves, and by extension help to address the issues that have led them to being monitored under the 2015 Act.
“China has a very large and growing bilateral trade surplus with the United States. This underscores the need for further implementation of structural reforms to rebalance the Chinese economy to household consumption, and for consumption-friendly fiscal stimulus to support demand,” the report said.
Beijing might agree with much of that but is unlikely to appreciate the advice being proffered in so public a manner.
As for Japan, the US Treasury reiterated its view that current conditions “in the dollar-yen foreign exchange market are orderly”, thus standing in opposition currently to any argument from Tokyo for intervention to weaken the Japanese currency.
Seoul is informed that “the appreciation of the won over the medium-term would help Korea reorient its economy away from its current reliance on exports”. Additionally the US “Treasury has urged Korea to limit its foreign exchange intervention only to circumstances of disorderly market conditions”.
Taiwan too “should limit foreign exchange interventions to the exceptional circumstances of disorderly market conditions”.
Seoul and Taipei might legitimately wonder who decides when market conditions are disorderly. Tokyo has likely worked out the answer already.
As for Berlin, it is the US Treasury’s view that “Germany has adequate policy space to provide additional support to demand”.
Beijing, Berlin, Seoul, Taipei and Tokyo now know the US Treasury has them formally in its sights.
And this is still President Obama’s administration.
Given the tone of the election campaign, the US Treasury’s current stance might just be a starting point for the next person to occupy the Oval Office.