Not a One-Off: The Trump Administration’s Approach to Currency

Financial news headlines were dominated earlier this month by China’s decision to allow its currency to weaken against the dollar and the subsequent designation of China by the U.S. Treasury as a “currency manipulator.” Far from a one-off move tied to the U.S.-China trade war, the “currency manipulator” designation was the latest in a series of actions that illustrate a desire by the Trump administration to place currency at the center of an “America First” economic policy.

In addition to the designation, the Trump administration has included a chapter on exchange rates for the first time in a trade agreement; expanded the list of economies covered in a semi-annual report to Congress on foreign exchange issues; and proposed modifications to countervailing duty (CVD) proceedings by the Commerce Department to take into account currency undervaluation. These actions emphasize the link between exchange rates and trade outcomes but neglect more consequential drivers of trade balances such as fiscal policy and credit conditions. Combined with presidential tweets lamenting a strong dollar, they also threaten to destabilize the international system.

A re-negotiated North American Free Trade Agreement (NAFTA) offers an early example of the Trump administration’s view of exchange rate policy as a central theme in trade. The revised agreement, the United States-Mexico-Canada Agreement (USMCA), includes a new chapter on “Macroeconomic Policies and Exchange Rate Matters” despite the fact that Canada, Mexico, and the United States have floating exchange rates, do not currently intervene in foreign exchange markets, and already meet disclosure and transparency requirements under the agreement.

But the chapter’s contribution is less about the obligations of USMCA signatories and more about the precedent set for future U.S. trade agreements (e.g., with Japan), with certain commitments legally enforceable and subject to dispute settlement under the agreement. Past U.S. administrations viewed any such commitments as outside the remit of trade negotiations, thinking it unwise to expose macroeconomic and exchange rate matters to the notoriously political topic of trade.

A second example comes from Treasury’s decision to expand the number of economies covered in its semi-annual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, and in lowering the thresholds used to determine currency manipulation under the Trade Facilitation and Trade Enforcement Act of 2015. These changes increased the number of economies included in the report from 13 in the Fall 2018 report to 21 in the Spring 2019 report, including the addition of Malaysia, Singapore, and Vietnam on the Monitoring List. The revised thresholds—on the current account deficit, frequency of currency intervention, and bilateral trade surplus with the United States—lower the bar for which economies will be monitored by Treasury and possibly labeled a currency manipulator.

It’s worth noting that Treasury designated China a “currency manipulator” on the basis of the more subjective criteria under the Omnibus Trade and Competitiveness Act of 1988, raising questions about the relevance of quantitative criteria under the 2015 legislation. While the tangible implications of a “manipulator” designation remain to be seen, the revised criteria and expanded list convey a more aggressive approach on currency. This is consistent with public comments made by Trump and senior officials in his administration about Germany, Japan, and Vietnam and raises questions about where expanded list and lower thresholds could lead.

A third example comes from the Commerce Department’s proposed rule that would permit a determination that currency undervaluation constitutes a subsidy under our CVD law. The proposed changes would clarify that Commerce could determine “the existence of a benefit resulting from a subsidy in the form of currency undervaluation, and clarify that companies in the traded goods sector of an economy can constitute a group of enterprises for purposes of determining whether a subsidy is specific.” To date, Commerce has not taken currency undervaluation into account, largely because U.S. laws, as well as World Trade Organization (WTO) rules, require a subsidy to be specific to a company or sector rather than general. The Commerce proposal would change that policy, both by allowing undervaluation to be considered and by changing the definition of “specific.” In addition, while Commerce will defer to Treasury’s assessment of undervaluation in making its determination as to countervailability, it also reserves the right to “disagree with that evaluation, based on the record as a whole . . .” If and when the proposed changes are made effective is uncertain—Commerce is currently reviewing public comments on the proposal—but the recent designation of China combined with a pattern of activism on currency suggest these changes are not being proposed for naught.

Trump clearly believes trade deficits are a big problem for the U.S. economy and that a strong dollar is to blame, sentiments expressed by a senior White House official who confirmed, “Trump believes that countries manipulate their exchange rate through monetary policy, which is why the president is turning to the Fed for help.” A Trump tweet earlier this week underscores the point, calling out a “dollar (that) is so strong that it is sadly hurting other parts of the world...” and blaming “the horrendous lack of vision by Jay Powell and the Fed.” (Jay Powell is the chairman of the independent Federal Reserve which sets monetary policy for the United States.) Trump followed-up by calling for rate cuts of “at least 100 basis points, with perhaps some quantitative easing as well.” Considering administration officials are simultaneously touting the U.S. economy’s strong performance, the call for dramatically looser monetary policy can only be seen as an effort to weaken the dollar—arguably the kind of manipulation the president rails against.

This is a big problem for the international monetary system, which has at its center the U.S. dollar, to say nothing of central bank independence which investors rely on even as Washington becomes increasingly dysfunctional. About a decade ago, as the global economy struggled to recover from the global financial crisis, G20 leaders agreed to “refrain from competitive devaluation of currencies,” knowing the harm that beggar-thy-neighbor policies can inflict on the global economy. Calling for monetary easing to weaken one’s currency would seem to violate that commitment. What’s more, recent analysis also suggests a weaker relationship between dollar strength and manufacturing employment than in the past, while drivers other than currency—for example, fiscal policy and credit conditions—are more consequential for external balances. Let’s hope the Trump administration takes this analysis into account and avoids a major policy mistake.

Stephanie Segal is senior fellow with the Simon Chair at the Center for Strategic and International Studies in Washington, D.C.

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