WASHINGTON (Reuters Breakingviews) - Currency wars appear to be making a comeback. The world will not be better off. The international community needs to rally together and stop this trend.
Earlier this year, the U.S. Commerce Department issued a regulation that allows duties to be applied on imports from countries whose currencies are deemed to be undervalued. Already, with the help of a Treasury Department undervaluation finding against the Vietnamese dong, Commerce is pursuing such a case against Vietnamese tires. A Treasury finding in a Chinese tie-twist case may soon be reached. Others may be next in line.
Now the U.S. Trade Representative’s Office wants a piece of the action. It is launching an investigation into Vietnam for currency undervaluation, which could ultimately result in tariffs.
While the United States is moving forward on these fronts, euro zone officials are expressing concern about euro appreciation, ostensibly because this would add to deflation. Many Asian countries have long sought to perpetuate export-led growth models, and intervention to limit currency appreciation may be on the rise. It is probably no coincidence that these developments are occurring at a time of lower global secular growth, reinforced by a collapse in activity because of the pandemic.
U.S. President Donald Trump’s team has taken a different approach to currency issues than past administrations. Early on, his team decried dollar appreciation and talked the dollar down. It moved to incorporate currency provisions into trade deals. China was designated as a currency manipulator, even though it was running a scant current account surplus and not intervening in the foreign exchanges. The administration emphasizes bilateral balances, which economists disregard, rather than overall accounts. And it is now deploying trade sanctions to address currency issues.
Using trade remedies to address perceived harmful currency practices has long been debated in Washington. Previous U.S. administrations resisted such thinking. They saw exchange rates as a product of macroeconomic policies and global financial flows, not just trade accounts, recognizing that capital movements could swamp trade flows on exchange markets. They felt many remedial proposals were inconsistent with World Trade Organization rules. They believed that currency undervaluation could not be precisely measured, let alone on a bilateral basis. They emphasized the importance of overall current account positions, not bilateral trade. They knew the United States should show a bit of humility about throwing stones while standing in a glass house.
The United States is hardly now an innocent bystander. The administration’s own fiscal policies and aggressive trade actions and rhetoric underpinned dollar appreciation. America often blames foreigners, failing to fully acknowledge the impact of its own policies and the role of technological change in disrupting jobs and the U.S. economy, including the secular decline in manufacturing. It accepts the benefits of globalization, but is less candid about adjustment costs. America’s deep and liquid capital markets attract capital from throughout the world, boosting the dollar. The greenback’s reserve currency role entails costs for America, but is still of overall benefit.
Other countries are hardly saints themselves. Many have long pursued export-led growth models, often relying on the health and openness of the U.S. economy to support global demand. To this end, countries sometimes intervened to limit currency appreciation. This was particularly true of China before the global financial crisis, and it remains the case for many east Asian countries today. Germany and Switzerland also run massive surpluses. Some countries have also deployed industrial policies and trade-distorting measures to buoy external positions.
The United States is fully justified in calling such practices out. The beggar-thy-neighbor currency wars of the 1930s demonstrated the dangers of foreign-exchange protectionism and politicizing exchange rates. The international community may only harm the global economy and international monetary system if it reprises such protectionism, especially amid lower global secular growth and the pandemic.
All countries need to recommit themselves to multilateralism and refrain from protectionist actions. Countries with large current account surpluses need to boost their domestic demand, allow currency flexibility and avoid excessive reserve accumulation.
The United States can do a better job in resisting the temptation to blame foreigners and instead acknowledge and tackle its own woes. Rather than pursuing trade sticks which could create global divisions and retaliation, it should vigorously engage countries behind the scenes about their currency practices when it believes these are harmful, and call them out if needed.
The International Monetary Fund was created in part to avert counterproductive currency policies and bilateral foreign-exchange disputes. Its exchange-rate analysis has significantly improved in recent years. But that is not the same as acting. The last two decades show that the fund has not found its voice in calling out harmful currency practices, one of its core missions.
Currency protectionism can only hurt the global economy and international monetary system. The administration’s latest actions run such a risk. Rather than going down this path, the United States should lead the global economy in finding solutions.
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