By Kyle Ferrier
Attempting to contest rumors in Seoul that the U.S. would name Korea and/or China a currency manipulator for political reasons, last month I argued against both the possibility of such a decision and the scope of its financial impact. Thankfully, my points on the latter were not necessary.
Last Friday, the U.S. Treasury released its Semiannual Report on International Economic and Exchange Rate Policies, which did not find any trading partner to be manipulating its currency. Despite concerns that it would be influenced by political considerations, the report shows no obvious signs of interference, following the same format and methodology as previous ones. However, Trump’s separate comments on China as a manipulator before and after the report’s release send mixed signals as to whether future decisions could be politically motivated. How should Korea interpret both the report and Trump’s statements?
The first takeaway is the strength of institutional checks on the president which help to ground policies in evidenced-based decisions. Throughout his campaign, and even as late as April 2, Trump was highly critical of China’s currency policies, going so far as to call them “the greatest currency manipulators ever” and the “world champions” of currency manipulators. Yet, last Wednesday, only two days before Treasury’s report was released, Trump plainly stated “They’re not manipulators.” Trump did not publically lament that the formal process of naming a manipulator forced him to change his mind, nor is he likely to do so in the near future. However, it likely played a significant role in the recent outcome.
Treasury’s report is issued in accordance with the requirements outlined in the Trade Facilitation and Enforcement Act of 2015, which requires the department to track three criteria to gauge if a partner country is manipulating its currency: “(1) 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.” In previous reports, Treasury has interpreted these criteria as (1) a bilateral goods trade surplus of $20 billion, (2) a current account surplus larger than 3 percent of GDP, and (3) repeated net purchases of foreign currency more than 2 percent of GDP over the previous 12 months. To name Beijing as a manipulator would have required lowering these thresholds to meet China’s current economic conditions, and to pressure them for the future would have required lowering the thresholds at least to some degree. No such changes were reflected in Treasury’s most recent report.
The role of Treasury Secretary Stephen Mnuchin as well as the broad application of the criteria across countries, making it difficult to single out a country for political reasons without negatively impacting others, likely played an important part in keeping external influence out of Treasury’s report. Though Trump has been more vocal, Mnuchin has consistently supported the established review process for possible currency manipulation. His oversight of the process and the growing influence of like-minded advisors in the administration are suggestive of Mnuchin’s sway in the report’s determination. Lowering the thresholds for Treasury’s three criteria to target China could also negatively impact other countries at risk of receiving the manipulator label, including Japan and Korea, which, as I have argued elsewhere, is not something the administration is keen on doing at this time. Furthermore, since Trump admitted China is not manipulating its currency, if Treasury were to lower these levels in the future, the insertion of political influence would be highly transparent.
The second takeaway is Trump’s preference to directly tie security and economic considerations. Although Trump stated China has not been manipulating its currency for months to support his claim last week, he implicitly contradicted himself when he tied the issue to Beijing’s support on North Korea. After Treasury’s report was released, he tweeted from his personal account: “Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!” This linkage, which comes after Chinese President Xi Jinping’s visit to Mar-A-Lago, mirrors Trump’s approach towards Japanese President Shinzo Abe, working to tackle both North Korea and the foundations for a new trade agreement. Yet, as illustrated above, the formal institutional means on international currency policy are not structured to accommodate such an approach. Though that may not stop Trump from seeking less-trodden paths to pursue the same goals.
While both takeaways certainly hold water and are not necessarily mutually exclusive for now, time will reveal the influence of each in driving Trump’s international currency policy. Is the linkage of China’s currency policy to cooperation on North Korea Trump posturing after being forced to accept Treasury’s conclusions? Is he actually able to convince Mnuchin to go after China and willing to potentially inflict collateral damage on allies in the process? Answering these questions will likely boil down to if and how the administration reacts to the Chinese approach towards North Korea over the coming months, but the stipulations of their cooperation are still unclear. What outcomes would sufficiently demonstrate China’s pressure on North Korea? How long is the administration willing to wait to see results? Perhaps cooperation will not be judged on outcomes, but on perceived efforts alone? There a number of different ways this could play out, but the one thing that seems to be assured in the near future is uncertainty.
Though much of the uncertainty surrounding currency manipulation is being driven by the U.S., Korea can certainly take steps to minimize potential challenges. The next administration in Seoul should pursue a two pronged approach. The first prong should be to increase the transparency of exchange rate interventions. Treasury has consistently encouraged Korea to publish exchange market intervention data. Doing so would allow for greater understanding on the only one of Treasury’s currency manipulation criteria Korea does not currently meet. The second prong should be elevating outreach to the U.S., including a summit with Trump as soon as possible. Trump’s anecdotes about what he has learned from meetings with foreign leaders speak volumes about the importance of getting face time with him.
Additionally, when dealing with President Trump, whoever assumes the presidency in May should note that both takeaways from the recent string of events have broader implications. Trump will likely attempt to tie together major security and economic issues in U.S.-Korea relations in an attempt to receive concessions, but may very well overplay his hand in certain areas depending on the relevant domestic institutional checks. Yet, Seoul would be wise not to venture too far from longstanding alliance norms, which could provide Trump a more sympathetic audience in Washington for any potential corrective economic measures.
Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from Roman Boed’s photostream on flickr Creative Commons.