WASHINGTON: President Donald Trump’s renewed focus on what he calls”unfair” exchange rates could presage a new global battlefield that has thepotential to do great damage to the world economy.
Trump has spent two years attacking the underpinnings of the global tradingsystem, launching multi-front tariff wars on allies and adversaries alikewhile complaining that the United States has been taken advantage of.
Under a proposed new rule that could come into effect as early as nextmonth, the US may impose punitive tariffs on any country it determines ismanipulating its currency to make its products more competitive thanAmerican goods.
Trump has frequently attacked eurozone countries like Germany forbenefitting from a relatively weak currency and last week said, “They havebeen getting away with this for years, along with China and others.”
As Trump’s attack on European Central Bank President Mario Draghi in thepast week shows, once-mundane monetary policy moves could be used asammunition to justify retaliation.
Economists warn this opens the door to a damaging global currency warpitting everyone against everyone.
If Trump follows this new path, likely with the backing of CommerceSecretary and trade hardliner Wilbur Ross, the United States would bevulnerable to retaliation when the Federal Reserve eventually cuts thebenchmark interest rate as Trump has demanded they do.
Central banks use interest rate cuts to spur a sluggish economy, weakeninga currency’s value in exchange for boosting exports, which then powereconomic growth.
Mark Sobel, who served in the Treasury for years under Republican andDemocratic administrations, said he has “serious reservations” about thenew plan.
In his submission to the Commerce Department, he said the rule change is”fundamentally flawed … and could prove counterproductive and harm the USeconomy.”
– Dubious legality –
Over the years, lawmakers and presidents from both the Democratic andRepublican parties have floated plans to go after governments thatmanipulate their exchange rate to compete in the global trading system.
But the efforts — mostly aimed at China — have always been resisted andeventually abandoned, in part because they were viewed as a violation ofglobal trade rules.
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And ironically, China has not been intervening in markets in recent yearsexcept to keep the yuan from falling, and the currency has instead gainedin value since the financial crisis.
Currently, the US Treasury issues a twice-yearly report scrutinizingpossible currency manipulation.
But since the mid-1990s, the department has never taken the final step oflabeling a country as a manipulator, even in the years when China was veryactive in its efforts to keep the yuan weak.
Now the Commerce Department has moved to wrest control of the issue awayfrom the Treasury by proposing a rule modification that would allow it totreat currency manipulation the same as it would a foreign governmentsubsidy that harms American manufacturers.
If approved, Commerce could impose tariffs to offset the weaker exchangerate against the US dollar. The department is accepting comments from thepublic until June 27, and could implement the change any time after that.
According to the proposal, Commerce said it would defer to Treasury’sevaluation of whether a currency is undervalued, “unless we have goodreason to believe otherwise.”
That ambiguity raises red flags for economists, many of whom believeCommerce does not have the technical expertise to make that evaluation.
The plan “would grant the Commerce Department excessive discretion,” Sobelsaid.
It also is notoriously difficult to calculate objectively whether aparticular currency is undervalued and, if so, by how much.
For years, the Peterson Institute for International Economics produced areport evaluating exchange rates but stopped “because they were completelyarbitrary,” the think tank’s chief Adam Posen told reporters recently.
“China should have been hammered hard in the early, mid-2000s for massivemanipulation of the currency,” Posen said, but to do so now is “prettyclose to absurd.” -APP/AFP
