Washington Update: The Impact of Labeling China a Currency Manipulator
While many Americans have been Googling the term “currency manipulation” over the last two days, one White House adviser has been enjoying the spoils of victory after a nearly decade-long policy fight. (To save you the search, a “currency manipulator” is a government that deliberately adjusts the value of its currency to influence its exchange rate or commercial policies as compared to other economies.)
This blog last week discussed White House Director of the Office of Trade and Manufacturing Policy Peter Navarro’s growing influence over President Donald Trump’s economic policy, and Navarro’s fingerprints are all over the president’s decision Monday night to have the U.S. Department of the Treasury officially designate China a currency manipulator. Navarro’s 2011 book, Death by China, recommended the action and it has long been thought that the former University of California-Irvine economics professor was behind then candidate-Trump’s 2016 campaign pledge to label China a currency manipulator on “day one” of his administration. (Navarro also produced a film called “Death by China.” It premiered in 2012.)
To be fair, though, other figures in Washington have also been pushing the president on this issue.
As Vox noted, Senate Minority Leader Chuck Schumer (D-N.Y.) “has been urging Trump to take this step since his first weeks in office, and he reiterated that call just about an hour before Trump did it.” The left-leaning Economic Policy Institute also has argued for almost a decade for this designation. And former Senate Finance Committee Chair (and former U.S. ambassador to China) Max Baucus (D-Mont.) was on board as far back as 2005.
Don’t let the current bipartisan agreement between President Trump and Sen. Schumer fool you into thinking Washington has suddenly stumbled into some kind of bipartisan kumbaya, however. Monday’s move is absolutely controversial, but, in the current context, it’s not clear that it amounts to much more than posturing.
In an interview with Bloomberg Television, Clinton Treasury Secretary Larry Summers criticized the move, arguing there was not much justification for it. There also was reportedly disagreement within the Trump administration about the decision. (We know former Trump economic adviser Gary Cohn was no fan, and current Treasury Secretary Steven Mnuchin also has been skeptical of the idea.)
It also is worth noting that Monday’s decision is a reversal from one the Treasury Department made just nine weeks ago. The agency puts out a report evaluating foreign nations’ currency practices twice yearly. The last one was released in late May. While that report said the Treasury Department had “significant concerns” about China, those concerns were not sufficient for the U.S. government to formally accuse the nation of manipulating its currency. In fact, according to The New York Times, two months ago the department found “China met only one of several criteria for determining whether a country was a manipulator.” (Interestingly, in addition to China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam have long been on the Treasury Department’s currency manipulation watch list.)
The practice of labeling a country a currency manipulator is so rare that the last time the United States formally made the accusation was 1992. (It was China at that time too, and that designation lasted until 1994). The only other times the designation has been used were in 1988 when the Treasury Department accused both Japan and Taiwan of the practice.
A 2005 Government Accountability Office (GAO) report found those designations were fruitful – at least in the short term. After giving the countries the black mark, the U.S. government was able to engage in negotiations and all three countries “made substantial reforms to their foreign exchange regimes.” The GAO said the countries’ “currencies appreciated and external trade balances declined significantly until they reached the point at which the three were removed from the list of currency manipulators.”
Can the United States expect a similar outcome this time?
Probably not. As The Wall Street Journal explained, the justification for the Trump administration’s designation is much more transactional than the previous instances in which a country has been labeled a currency manipulator. To wit, according to the Journal, “The ultimate reason for designating a country a currency manipulator is to justify some sort of retaliation.” Tariffs, for example.
But President Trump obviously already has shown his willingness to impose trade penalties on Chinese products – and the United States has been engaged in trade talks with China for almost two years. In other words, despite the financial markets’ bearish reaction to the announcement, the measure is largely symbolic in the current geopolitical context. (As The Journal notes it would have carried “more oomph against a country that’s not already in the middle of a trade war” with the United States.)
And while the designation also allows the United States to plead its case to the International Monetary Fund, that step is “not likely to lead to formal penalties” against China, CNBC concludes.
Monday’s designation also gives President Trump the ability to ban Overseas Private Investment Corporation financing in China (OPIC is a federal government agency that provides funding to U.S. companies to invest in emerging markets) and to exclude China from U.S. government procurement contracts. Even that will not do much, however. As Reuters notes, “China is neither a major recipient of government contracts nor financing from OPIC …”
As a result, former U.S. Treasury and IMF official Mark Sobel concluded, “There’s not much here.”
President Trump’s decision, of course, will impact U.S.-China trade negotiations. China reporter Bill Bishop said the decision “is another sign that U.S.-China relations are in a rapidly descending spiral with few near-term prospects for stabilization.” Bishop noted Goldman Sachs told clients on Monday evening that it “no longer expect a trade deal before the 2020 election.”
That prediction, it turns out, is the same one President Trump himself made not two weeks ago.
Steve Boms is the founder and President of Allon Advocacy, LLC, a Washington, D.C.-based public policy consulting firm. Steve has spent his career focused on complex financial services public policy issues, having worked in the United States Congress on the committee with jurisdiction over banking. He has led advocacy efforts and public policy teams globally for equity options exchanges, large U.S.-based financial institutions, and leading fintech firms. In addition to working directly with Allon's clients, he is a frequent conference panelist and his perspective is solicited by reporters on the technology, financial services, and regulatory beats.
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