Politics trumps economics in new currency war

China's Central Bank Governor Yi Gang approaches to greet US Treasury Secretary Steven Mnuchin during the G20 finance ministers and central bank governors meeting in Fukuoka, Japan, 8 June 2019 (Photo: Reuters/Kim Kyung-Hoon).

Author: Joseph E Gagnon, PIIE

On 5 August 2019, the US Treasury Department designated China as a currency manipulator after the Chinese renminbi depreciated beyond the psychologically significant level of seven yuan per US dollar.

This action comes three months after the US Treasury’s semi-annual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States added Malaysia, Singapore and Vietnam to a monitoring list of nine countries, including China, Japan, and South Korea, that meet some of the criteria used to identify currency manipulators. It also comes weeks after a proposal by the US Commerce Department to extend countervailing duties to cover imports subsidised by a deliberately undervalued exchange rate.

The US government is clearly concerned about the exchange value of the dollar and its role in perpetuating a large US trade deficit — a key policy concern for US President Donald Trump. But these actions have little practical significance by themselves. The currency manipulator designation carries no meaningful sanctions that are not already in place against China. None of the countries on the monitoring list are likely to be designated manipulators in the near future. And countervailing duties, which would normally require a designation of currency manipulation, would apply only to Chinese imports, which are already subject to punitive tariffs.

US Treasury had been following a flawed set of criteria for currency manipulation that had at least some grounding in theory and data. But with the designation of China, it has abandoned even the pretence of a strategy that treats partner countries fairly and objectively. These actions take the world further from an effective framework for dealing with the real threat of currency manipulation.

C Fred Bergsten and I define currency manipulation as excessive …continue reading