On Friday April 14 Treasury released a report that deemed no major trading a currency manipulator but five countries have met two of the three criteria and therefore will be closely monitored. This report is very well laid out but it is not incendiary as it seeks to persuade with a very soft touch. The three criteria of meeting of being a “manipulator” are:
1. A significant bilateral trade surplus with the U.S.of a least $20 billion;2. S current account surplus is at least 3% of a nations GDP; and3. Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2% of a nation’s GDP in a 12-month period.
Five nations met at least two of the three criteria and will be on a monitoring list: Japan, Korea, Taiwan, Germany and Switzerland. China is on the list solely on the basis of its massive bilateral trade surplus with the U.S. Switzerland is on the list but the U.S. Treasury cites the reason for Swiss intervention being the upward pressure on the FRANC due to the Swiss role as a haven for times of geopolitical strife. The Treasury noted that even with the SNB‘s continued currency intervention, the IMF maintains that the Swiss currency is overvalued. Germany is the biggest problem but because it does not control its monetary policy so it cannot meet the three criteria and be labeled a “currency manipulator.”
But the U.S. softly pushes all those countries on the monitor list to increase their use of fiscal stimulus in an effort to rebalance their massive trade and current account surpluses to rectify the years of the U.S. bearing the burden of the being the market of last resort. The bottom line is that the U.S. is pushing for a massive global stimulus program propagated by those enjoying the greatest benefits of the global economic system.
As the report to Congress said:
“The current global configuration of external positions, in which there are pockets of extremely large trade and current account surpluses, is untenable. The U.S. cannot and will not bear the burden of an international trading system that unfairly disadvantages our exports and unfairly advantages the exports of our trading partners through artificially distorted exchange rates. Treasury is committed to aggressively and vigilantly monitoring and combating unfair currency practices.”
This is certainly the most incendiary paragraph in the report and while taking a compromising tone in its recommendations the world is being put on notice.
In Monday’s Financial Times, U.S. Commerce Secretary Ross enhances the strident tone above in his criticism of IMF Director Lagarde. Ross called the IMF warnings about U.S. protectionism “rubbish.” Ross noted that the attacks leveled at the U.S. were just the global elite aiming their criticism on the new administration. With the United States running a $500 billion trade deficit they were clearly aiming at the wrong target. The world’s financial ministers are in Washington at the end of this week for the IMF and World Bank spring meetings. The Ross remarks will ensure that the meetings will be incendiary and that the Trump administration does not plan to follow the playbook of previous administrations. As Ross said: “We are the least protectionist of the major areas. We are far less protectionist than Europe. We are far less protectionist than Japan.We are far less protectionist than China.”
The FT article goes on to explain that Ross sees the Bretton Woods system as aiding the imbalances in global trade. He accused Lagarde and other defenders of the current multilateral system of “sloganeering” of trying to preserve a system that has contributed to the ballooning of the U.S. trade deficit since the 1970s. This is the Trump agenda of rolling back Pax Americana in its economic form. It seems that President Trump is serious about curtailing the costs of the American Empire.
The Tweeter-in-chief has softened the tone. But the world has been put on notice that the past will not be prelude to the future. An interesting view of Trump is that he is prepared to use the DOLLAR and trade policy to negotiate for international cooperation. In an afternoon tweet, he said, “Why would I call China a currency manipulator when they are working with us on the North Korean problem?” For the Donald everything is a trade-off. I advise rethinking any bullish dollar position once the French elections are over. If the DOLLAR becomes a mere bargaining chip be ready for greatly increased volatility in the global financial markets. Germany will certainly be the most interesting test for the way Donald and Wilbur try to set in motion an effort for global rebalancing.