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Monthly Archives: November 2016

In his “Contract with the American voter”, Donald Trump pledged to “direct the Secretary of the Treasury to label China a currency manipulator”.  Though Trump would likely have some degree of discretion to do this, I think he will be constrained by statutory restrictions pursuant to the Omnibus Trade and Competitiveness Act of 1988 and Trade Facilitation and Trade Enforcement Act of 2015 which will serve to limit his discretion.  These restrictions are important given the latitude of defensive actions an Executive may authorize against classified currency manipulators.

It’s also relevant that Trump has not surrounded himself with people eager to label China as a currency manipulator.  In 2009, Democrat Tim Ryan (who is now, notably, is trying to unseat Nancy Pelosi as minority leader) introduced the “Currency Reform for Fair Trade Act”, H.R. 2378, which was primarily aimed at China and would have authorized a “countervailing tariff” against exports from the country in question commensurate with the degree of fundamental undervaluation, as determined by the IMF.  The bill never became law, but passed the House 348-79, with majorities of both parties in favor of passage.  (Democrats and Republicans respectively voted 250-5 and 98-74 in favor of the bill).  And among the Republicans voting against H.R. 2378 were Mike Pence and Jeb Hensarling, both of whom are seen as top advisors to Donald Trump (Mike Pence for obvious reasons and Jeb Hensarling as an advisory on financial issues and possible Treasury Secretary).

The Trade Enforcement Act of 2015 offers the clearest statutory provisions for labeling and penalizing a country for manipulating its currency.  Among other things, it requires that Treasury submit a report to Congress regarding “macroeconomic and currency exchange rate policies of each country that is a major trading partner of the United States”.  It further requires an “enhanced analysis” for trading partners that,

  1. have a “significant” bilateral trade surplus with the United States,
  2. a “material” current account surplus, and
  3. engaged in “persistent” one-sided intervention in the foreign exchange market.

The Trade Enforcement Act requires Treasury to publicly describe the factors used to make this assessment “not later than 90 days after [the Act] is enacted”.  In April, Treasury presented such a report which included explicit thresholds necessary to meet the aforementioned conditions:

  1. An economy has a significant trade surplus with the United States if its bilateral trade surplus is larger than $20 billion (roughly 0.1 percent of U.S. GDP) which captures around 80 percent of the value of all trade surpluses with the United States last year.
  2. An economy has a material current account surplus if its surplus is larger than 3.0 percent of that economy’s GDP.
  3. An economy has engaged in persistent one-sided intervention in the foreign exchange market if it has conducted repeated net purchases of foreign currency that amount to more than 2 percent of its GDP over the year.

For countries that require “enhanced analysis”, the 2015 statute prescribes several remedial actions, while reserving executive discretion to waive such action if it would negatively affect the US economy or threaten national security.

In general.–The President, through the Secretary, shall commence enhanced bilateral engagement with each country for which an enhanced analysis of macroeconomic and currency exchange rate policies is included in the report submitted under subsection (a), in order to, as appropriate–

  1. urge implementation of policies to address the causes of the undervaluation of its currency, its significant bilateral trade surplus with the United States, and its material current account surplus, including undervaluation and surpluses relating to exchange rate management;
  2. express the concern of the United States with respect to the adverse trade and economic effects of that undervaluation and those surpluses;
  3. advise that country of the ability of the President to take action under subsection (c); and/or
  4. develop a plan with specific actions to address that undervaluation and those surpluses.

Most importantly, the President is required to follow one or more of the following defensive actions if one year after after the commencement of enhanced bilateral engagement “the country has failed to adopt appropriate policies to correct the undervaluation and surpluses” :

  1. Prohibit the Overseas Private Investment Corporation from approving any new financing (including any insurance, reinsurance, or guarantee) with respect to a project located in that country on and after such date.
  2. Except as provided in paragraph (3), and pursuant to paragraph (4), prohibit the Federal Government from procuring, or entering into any contract for the procurement of, goods or services from that country on and after such date.
  3. Instruct the United States Executive Director of the International Monetary Fund to call for additional rigorous surveillance of the macroeconomic and exchange rate policies of that country and, as appropriate, formal consultations on findings of currency manipulation.
  4. Instruct the United States Trade Representative to take into account, in consultation with the Secretary, in assessing whether to enter into a bilateral or regional trade agreement with that country or to initiate or participate in negotiations with respect to a bilateral or regional trade agreement with that country, the extent to which that country has failed to adopt appropriate policies to correct the undervaluation and surpluses described in subsection.

The most recent report to Congress pursuant to the 2015 Act did not identify China as satisfying all three of the necessary conditions, which means Trump would likely be required to wait at least a year and a half before labeling China as a currency manipulator and pursuing any bilateral negotiation authorized thereof, as China would first have to be found to be in violation of the the appropriate benchmarks in the next report, due around April 2017, allowing retaliative procedures to begin in April 2018 if China fails to change course.

Furthermore, it’s not clear Treasury would even have the authority to find China deserving of “enhanced analysis” in the first place.  For one, the Act requires that Treasury publicly provide factors used in this assessment within 90 days after its enactment last year, and does not seem to authorize an amendment of these specific factors.  (That said, if a Trump Treasury redefines the specific benchmarks within the scope of the statutory requirements, it’s unlikely anyone would complain – especially since there appears to be bipartisan support for this policy.)

Therefore it seems quite unlikely China would even qualify for “enhanced analysis”, let alone be classified as a manipulator unless Congress amends existing statute.

  1. As the most recent Treasury report to Congress notes, China has been intervening to increase the value of its currency and their foreign exchange reserves have fallen substantially as a result.
  2. China’s current account surplus is below the 3 percent of GDP necessary under Treasury’s existing guidelines.
  3. Bloomberg recently reported that “Beijing was embroiled in a spate of frenzied dollar-selling last month as capital outflows and a depreciating yuan saw foreign-exchange reserves tumble by $80 billion”.
  4. Even new benchmarks, were they allowed, would need to be standardized, which might unwittingly require classification of Japan, Germany, and South Korea as trade manipulators.  (These countries are already closer to being currency manipulators under current guidelines – this year Germany, apparently, overtook China with the world’s largest current account, despite having a substantially smaller economy.)

The 2015 Act also prohibits any action that “is inconsistent with United States obligations under international agreements”.  I’m not familiar with the details of international trade treaties, but singling out China as a currency manipulator and pursuing actions required thereof, while tolerating greater grievances from other countries would seem to violate some Treaty, though that’s just speculative.

The President also has some authority from the Omnibus Trade and Competitiveness Act of 1988, though the language of relevant provisions suggests to me that the 2015 Act supersedes the 1988 Act insofar as currency manipulation is concerned.

If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.

(By language I mean “significant” trade and “material” current account surpluses.)  China was last labeled as a manipulator in 1994 pursuant to this requirement.

In short, given that Trump may be accompanied by advisors that are against labeling China as a currency manipulator, is probably not authorized under current statute to direct the Treasury secretary to label China as a manipulator unless it rapidly changes its course, would still need to wait a year after the next analytical report to pursue any action, would unlikely find that China’s currency is even undervalued if it did perform an “enhanced analysis”, and would probably have to also label Germany and Japan as currency manipulators for any reasonable interpretation of the statutory requirement, it seems unlikely that this will become a problem in the foreseeable future.

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