Dealing with Currency
April 16, 2018
Late last Friday, the Treasury Department released its semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, better known as the FX Report. One might think the timing says all you need to know about the report's contents: no major changes, nothing to see here. As one long-time observer of the report commented, it was "written to be ignored."
In some respects-beyond the timing of its release-the muted reaction is understandable: for the fifth time since the report was updated in April 2016 to comply with the Trade Facilitation and Trade Enforcement Act of 2015, no economy has met all three criteria for enhanced analysis or been judged to be a currency manipulator. True, India was added for the first time to the Monitoring List-joining China, Japan, Korea, Germany, and Switzerland-but India's inclusion had already been signaled in the October 2017 report and did not come as a surprise.
But if Treasury's intention was to avoid making news with the report, President Trump seemed to want to put currency in the news with an early Monday morning tweet indicating that "Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!" At a minimum, the tweet was confusing: Russia, as a relatively smaller trading partner of the United States, is not included in the report. As for China, Treasury estimates that China continued to intervene in foreign exchange markets to defend the renminbi (the opposite of devaluation) and acknowledges that for 2017, "the Chinese currency generally moved against the dollar in a direction that should, all else equal, help reduce China's trade surplus with the United States…(and) that since the beginning of 2018, the renminbi has continued to strengthen against the dollar." Taking those facts into account, the tweet appears to direct frustration at the Federal Reserve for raising interest rates, which other things equal, would tend to strengthen the dollar against other currencies, not just the ruble or renminbi. (It also raises concerns about central bank independence, but that is a topic for a separate commentary.)
There is another reason to dig a little deeper into the report for meaning: just days before it was issued, President Trump once again opened the door to the United States joining the Trans-Pacific Partnership (TPP) and then indicated the United States would "only join the TPP if the deal were substantially better than the deal offered to Pres. Obama." It's not clear what improvements to the TPP agreement would be sought, but currency has long been a sticking point for trade deals and one that the updated report, with its "reporting and monitoring tools, as well as new measures to address unfair currency practices," was intended to address. In fact, in the context of TPP negotiations, the Obama administration secured a Joint Declaration of the Macroeconomic Policy Authorities of TPP Countries, which reaffirmed their commitment to avoid manipulating exchange rates to gain an unfair competitive advantage; required public disclosure of FX intervention, reserve composition, and other economic data; and established a mechanism for consultations among TPP "Macroeconomic Officials." While there are no guarantees, the commitments secured under the Joint Declaration are meaningful insofar as improving transparency and establishing a mechanism to address external imbalances.
Perhaps it's coincidence, but the report does indicate that Treasury is considering a future expansion in the number of economies covered in the report to achieve the administration's "main objectives of more fair and reciprocal trade and stronger, more balanced global growth." (Treasury has already exercised discretion regarding which economies to include, keeping Switzerland on the list even though it has dropped out of the top 12 trading partners of the United States.) It is a long way from here to there, but expanding coverage could support future TPP discussions on the margins. The current report-with its focus on the top 12 U.S. trading partners-covers only 3 of the 11 TPP economies (Canada, Japan, and Mexico), none of which currently intervenes in foreign exchange markets. Expanding coverage to include other TPP economies such as Malaysia, Singapore, and Vietnam, which have a more recent history of FX intervention, could help make the case that there are mechanisms to address foreign exchange and other macroeconomic policies that have the potential to distort trading relationships. Even independent of future U.S. involvement in TPP, the current list leaves out some of the more active FX interveners. While a relatively small economy's foreign exchange intervention might not distort the international system, many small economies attempting to gain competitive advantage through a weaker currency would be destabilizing.
It's also worth noting that one of the most consequential sentences from the fall 2017 report has been deleted from the spring 2018 report: "A key objective in the context of the North American Free Trade Agreement (NAFTA) renegotiation is the adoption of an appropriate currency mechanism that ensures that NAFTA countries avoid manipulating exchange rates to gain an unfair competitive advantage, and Treasury is evaluating how similar mechanisms can be negotiated in the context of other free trade agreements." (Gone too are references to the U.S.-China Comprehensive Economic Dialogue as a tool to expand market access for U.S. goods and services and to address industrial policies that unfairly discriminate against U.S. firms; and to using the G20 as a tool to facilitate more balanced global growth and a reduction in global imbalances.) It's not clear where discussions on currency in the NAFTA renegotiation or the U.S.-Korea free trade (KORUS) "agreement in principle" stand. What is clear is that currency remains an important issue for the administration and some members of Congress, and it will most definitely be relevant to any future trade negotiations.
Stephanie Segal is a senior fellow and deputy director of the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.
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