How the G20 can deal with Trump’s Chinese currency complaints in Baden-Baden

Photo: Trump Cartoon

Trump still aims to designate China as a currency manipulator

Last week in an interview with Reuters, U.S. President Trump labelled the Chinese as “grand champions at manipulation of currency”, indicating he has not fully backtracked from his campaign promise to designate China as a ‘currency manipulator’ on ‘day one’ of his Presidency. The position of Washington on this topic has not exactly been crystal clear, however, with the new U.S. Secretary of the Treasury, Steve Mnuchin, announcing on the same day as Trump’s comment that the Treasury was in fact still going through the formal process of analysing Chinese currency practices, and that no judgements would be made prior to the completion of that process.

As formal designation of China as a currency manipulator would require the Treasury to convince their Chinese counterparts to change their practices or face retaliatory measures, such as trade tariffs, the significance of the designation debate goes well-beyond mere semantics – up to and including a full-blown trade war.  The good news is that there is very little evidence China is manipulating its currency; the bad news is that the American President may expect Mnuchin to deliver a policy ‘victory’ all the same. Suffice to say, Secretary Mnuchin may have to do some fast-talking at next Month’s meeting of G20 Finance Ministers and Central Bank Governors in Baden-Baden, and in this respect, he could do worse than remembering some ‘G’ history, specifically the G7 meeting in 2013.

China is not keeping its currency lower than it should be.

While it is true the Chinese Renminbi is not a free-floating currency, there is general-consensus that the days of China pushing down the value of the RMB are, for now at least, behind us. In fact, in the last two years alone, China has decreased its holdings of foreign reserves by over a trillion U.S. dollars, with the knock-on effect of lowering the relative value of the U.S. dollar, and preventing the RMB from falling further. This is in part due to China’s transformational shift from export-led growth to domestically-focussed consumption-led growth, a major transition that is creating the kinds of economic jitters that, in the absence of Chinese central bank intervention, would, in all probability, have pushed the RMB to a point even lower than it is today. In short, from an external perspective, China’s policies that are focused on ‘smoothing’ domestic economic circumstances, have had the knock-on effect of boosting American competitiveness.

Admittedly, China’s huge expansion in export-led competitiveness throughout the first decade or so of the new millennium does in part appear to have been turbo-charged by concerted currency devaluation, on some estimates by up to 30 or 40 percent. But even the leading U.S. critic of China’s currency policies at the time, Fred Bergsten from the Peterson Institute for International Economics, acknowledges this is no longer the case. There are other more plausible lines of criticism to be made about Chinese support for its home-based industries, such as whether the cheap financing made available by state-owned banks to state-owned exporting firms is consistent with WTO rules (although the U.S. has failed on this front before), yet the horse has well and truly bolted when it comes to currency manipulation – this is yesterday’s battle.

Trump’s concerns about the value of the dollar unlikely to resonate with the G20

Aside from the weak case against the value of the RMB, it is also worth noting that many of the policies or threats floated by the Trump Administration will put an upward pressure on the value of the US Dollar. For example, should the administration go ahead with a ‘border adjusted tax’, as has been proposed on goods from Mexico or China, this would not only have the ‘robbing peter to pay paul’ effect, whereby foreign goods would become more expensive, leaving less money in the pockets of American consumers (albeit potentially more in the pockets of US producers of said good), it would also push up inflation, and thereby the value of the USD. Indeed the day after the election of Trump, the Mexican peso declined by 10 percent (boosting Mexican competitiveness in the U.S.), due to mere threat of tariffs. Similarly, whatever the merits of Trump’s infrastructure ambitions, which are still scant on detail, should he come close to mobilising the proposed $1 trillion of investment in infrastructure projects off the back of $137 billion in concessional government loans to private actors, the effective increase in government borrowing and concomitant stimulus effect throughout the economy will also presumably have inflationary and dollar appreciation effects. The U.S. administration’s recent indication that it even intends to renegotiate its bilateral terms of trade with any country with which it does not share a trade surplus, further undermines the negotiating stance of Mnuchin on any discussion about currency concerns in Baden-Baden.

How to retreat without admitting retreat

When it comes to G20 communiques, beauty is often in the eye of the beholder. And on particularly controversial points, a beautiful diplomatic sentence is one that allows multiple opposing sides to come away satisfied that their point of view has been adequately recognised. The G7 produced one such clause, on the issue of currency manipulation no less, at a 2013 meeting in London, amid a moment of particular concern about Japan’s then expansive program of quantitative easing, which had seen a decline in value of the Yen, the clause began:

We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets.”

Followed by an affirmation that

“our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”

At the time, the G7 statement was criticised in some quarters for being fairly obtuse, with markets feeling there was no clear indication as to whether the G7 was actually determined to convince Japan to change its policy direction or not. Yet the statement had the dual advantage of allowing the remaining G7 members to note that they had stood up against concerted currency devaluation, even if this did not include effective currency value declines caused by domestically focused growth ‘smoothing’ or quantitative easing policies, while simultaneously allowing Japan to assert that its policies were above-board as they were not explicitly of the ‘beggar-thy-neighbour’ devaluation variety. It’s a bit of a fudge, to be sure, but a statement along these lines in Baden-Baden could allow everyone to walk out of the room confident that they had stood up for their administration. It might mean little change to the prevailing status quo, but in 2017, that is no small thing.

Image: Hugh Jorgensen

Hugh Jorgensen works as a Policy Advisor in International Relations, G20 / T20

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