Last week, the US Department of Commerce finalised its rule on treating currency ‘undervaluation’ as a countervailable subsidy. It is a poorly conceived proposal and harmful to longstanding US international monetary and financial policies. Commerce gave little, hollow consideration to many comments submitted on its draft proposal.
It acknowledges that there is no precise way to measure equilibrium exchange rates and thus under/overvaluation. But it discusses a raft of possible measures and asserts that Commerce is accustomed to making difficult assumptions to undergird its (controversial) countervailing duty determinations. It is thus dismissive of this fundamental issue.
Commerce recognises that it must translate multilateral undervaluation into an estimated bilateral undervaluation. Yet, no explanation is offered on how it will do so. The degree of bilateral undervaluation with China, for example, varies if one believes the equilibrium bilateral balance is $400bn, $200bn, or zero. This critical point was not discussed. Economists dismiss the relevance of bilateral balances, but that is a side point in President Donald Trump’s administration.
Commerce correctly observes currency ‘manipulation’ and ‘undervaluation’ are not the same thing, and thus its exercise differs from Treasury’s foreign exchange reports. But taking China for example, it has a small current account surplus as a share of GDP, hasn’t been intervening for years, and the International Monetary Fund regards the renminbi as fairly valued. There is little indication how Commerce will take such factors into account, if at all, other than its references to defer ‘generally’ to Treasury.
It emphasises it will focus on ‘government action’ contributing to undervaluation. The euro can be seen as undervalued. It is overvalued for some members and heavily undervalued for others, such as Germany with its whopping current account surplus that distorts the global distribution of demand. Germany’s ‘undervaluation’ is partly associated with high national savings, including its continuously restrictive fiscal policies, which Berlin has been unwilling to change despite repeated international criticisms. Does the persisting restraint in German fiscal policy constitute ‘action’ or ‘inaction’?
The proposal comes across as insincere saying it will ‘not normally’ include monetary policy of an independent central bank in assessing ‘government action’. The People’s Bank of China is not independent. But ‘not normally’ goes undefined, suggesting Commerce may indeed take monetary policy into account. Clearly, if one is looking at ‘government action’, monetary policy becomes inseparable from macro policy and foreign exchange intervention can be integral to monetary policy.
The proposal ignores the impact of US policy. Imagine a world consisting of America and Country X. Let’s hypothesise that the US runs an expansionary fiscal policy, pushing up the dollar, which becomes overvalued, and that Country X is running balanced policies. Country X’s currency will nonetheless be undervalued, representing the flip side of the dollar’s policy-induced overvaluation. Presumably under this proposal, industry could file a claim and Commerce may sanction Country X.
The discussion of the Treasury Department’s role is damaging and disingenuous. Commerce observes repeatedly it will ‘generally’ defer to the Treasury, given the latter’s expertise on exchange rate matters. One might suspect that Commerce could drive a truck through such open-ended terms as ‘generally defer’, as well as ‘not normally’.
Commerce argues its proposal meets the World Trade Organisation’s test for a subsidy’s specificity. This is a novel interpretation, disputed by trade lawyers, experts, and the conclusion reached by the Bush and Obama administrations. Indeed, the Bush administration publicly stated so as diplomatically as possible.
Commerce’s draft proposal includes an economic impact assessment. The estimates proffered encompass a huge impact range from $3.9m to $3.14bn. The range is so large as to strain credulity and suggests Commerce sought blanket and unconstrained flexibility for itself. Despite much verbiage, the final proposal remains status quo.
The Treasury has long been the lead agency with responsibility for international monetary and financial policy. Exchange rates are not determined by just trade flows, but by capital flows responding to monetary, fiscal and other policies. Current account positions reflect macro forces, mirrored in saving and investment balances. Capital flows swamp trade flows. Yet, now Commerce – with zero expertise on currency matters – has usurped a huge role for itself on foreign exchange issues, presumably with the White House’s blessing and Treasury’s probable submission. This will hurt Treasury’s international standing and relationship with the IMF. It is a black mark on Treasury’s long distinguished history and traditions, and an ominous sign for foreign financial authorities.
The 1930s was an era of beggar-thy-neighbour currency protectionism and bilateralisation of exchange rate disputes. While our brave soldiers fought valiantly in world war two, our financial diplomats created an international monetary system seeking to avoid the sins of the past. Despite shortcomings, that system helped deliver unprecedented prosperity. To be sure, harmful currency practices exist and should be countered vigorously. But Commerce’s proposal is the wrong way forward. It is more in keeping with the protectionist ‘currency war’ mentality of the 1930s.
Mark Sobel is US Chairman of OMFIF.