How a man called Wilbur could blow up trade war truce

When the proposal was first aired last year it generated some controversy because it is the US Treasury that has been designated by Congress to produce a bi-annual evaluation of whether a country is manipulating its currency. In none of its more recent reports have any of America’s trading partners met the criteria to be labelled a currency manipulator.

The Treasury department was said to be opposed to the Commerce department’s proposal when Ross first put it on his agenda but, while Ross said on Tuesday that his department would “seek and generally defer” to Treasury’s expertise on currency matters he made it clear he reserved the right to act independently.

The department, in assessing whether there had been government action that resulted in currency undervaluation, would not normally include monetary and related credit policy if an independent central bank or monetary authority, he said. That’s rather peculiar, given that monetary and credit policies would normally have the biggest influence on exchange rates.

Also peculiar is the probability, given that, in its reports to Congress, Treasury hasn’t labelled any of America’s major trading partners a currency manipulator in decades, the Commerce department will be deeming a country is a currency manipulator even as Treasury has said they are not.

When the US and China signed their Phase One trade truce US Treasury removed China from its list of currency manipulators (even though none of its recent reports had found that China has manipulated its currency) after China gave a commitment to avoid competitive devaluations as part of the trade truce – an easy commitment given that its interventions in currency markets in recent years have been to prop the renminbi up, not devalue it.


It would appear, however, that the Commerce Department can ignore Treasury’s evaluations and simply declare that a country, even China, is manipulating its currency to keep it artificially low and slap duties on imports that impact US companies.

It’s not quite preparations for a full-scale currency and/or tariff war. The application of the “countervailing duties” is targeted to particular imported goods and individual foreign producers rather than all a trading partners’ exports to the US.

That means it won’t have quite the same impact as the heavy tariffs Trump imposed on most of China’s exports to the US, most of which remain in place.

It is conceivable, however, that Ross and his department could do what the administration did to Brazil and Argentina last year, where it used accusations of currency manipulation to impose tariffs on their steel and aluminium exports – despite all the evidence being to the contrary.

Under Ross the number of anti-dumping investigations his department has initiated has nearly trebled – there have been about 200 new investigations launched since Trump took office. At the moment the department has more than 500 anti-dumping and countervailing duty orders in place.

While some of those might be legitimate, the cynical would read the explosion in Commerce Department action as just another expression of the administration’s protectionist instincts.

The new regulation would appear to be designed to give it more grounds to act to protect particular US companies or industries. There is no expectation, yet, that there will be a spate of activity generated by the expanded criteria for imposing duties.

It is worth noting, however – as Ross did in announcing the new rule – that successive US administrations have considered countervailing duties in response to foreign currency “subsidies’’ but decided against the action the US is now taking.

The new regulation could be interpreted as a warning shot to America’s trading partners (as if they needed one) that regardless of the influences that might have caused their currency to depreciate (China’s has, for instance, understandably weakened as the coronavirus spread) the US may still impose tariffs.

Trump has been obsessed with exchange rates, haranguing the US Federal Reserve board consistently to lower US rates, even to negative levels, to lower the dollar against the other major currencies.

He has accused Europe, China and Japan of manipulating their currencies to unfairly improve the competitiveness of their exports, even though the rate settings in Japan and Europe – as they did in Brazil and Argentina – clearly reflect the weak state of their economies and their exchange rates with the US the relative strength of the US economy.

The new regulation would appear to be designed to give it more grounds to act to protect particular US companies or industries.

The use of tariffs/countervailing duties as its weapon of choice in the $US5 trillion ($7.4 trillion) to $US6 trillion a day global currency markets wouldn’t necessarily be an effective strategy even if used selectively.

As we saw last year through the ebbs and flows of the trade stoush with China, even though the tariffs were less than effective in forcing China to meet the US demands and were effectively borne by US companies and consumers rather than Chinese exports, the markets are very sensitive to any change to the intensity of trade relationships.

If the administration dials those tensions up by imposing new tariffs on other countries’ exports, capital will flow towards the perceived safe haven of US capital markets and the dollar will strengthen. At a number of levels, the deployment of tariffs to achieve macro trade objectives is a counter-productive approach.

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