The mid-April deadline for the next US Treasury report on the foreign exchange policies of major trading partners looms. The Treasury’s civil servants do an outstanding job. They can do even better.
Since the passage of the 2015 Trade Facilitation and Trade Enforcement Act, the report has focused more narrowly on an intensive evaluation of three criteria: whether the top 12 US trading partners have significant bilateral surpluses with the US, material current account surpluses, and engaged in persistent one-sided foreign exchange intervention.
The Act does not preclude a more fulsome global economic discussion. After all, current account positions, capital flows and exchange rates are the product of macroeconomic policy mixes, underlying saving and investment trends, and so on. The Federal Reserve chair testifies twice annually to Congress on the Fed monetary policy report – formerly called the Humphrey-Hawkins report. The Treasury should conceive of its foreign exchange report as the Humphrey-Hawkins of the global economy. This would allow the Treasury to better educate and share with the public its thinking on global economic issues. Some of this has been done through annexes to the foreign exchange report.
Many analysts are concerned about Chinese financial leverage and whether credit is being allocated to the state-owned sector at the expense of the private sector. They wonder what this means for China’s growth prospects, especially given high growth targets, demographic trends and the need to boost consumption and services.
Many argue China acts as an assembly hub for some goods from Asia, adding only slightly to the value of an export to the US, while the US ascribes the full value to China. Hence, it is said that China’s bilateral surplus with the US is overstated.
Japan is raising its consumption tax this year. Twice before such increases have hugely set back Japanese growth. There are pressing questions about European risks – Britain’s exit from the European Union, Italian debt. The public can only benefit from hearing what the Treasury thinks about these issues.
Journalists and Congress call the foreign exchange publication the ‘China report’, skimming it for whether the Treasury finds China ‘manipulates’ the renminbi. No such finding has been rendered since 1994. Yet, once a ‘no’ finding is confirmed, the report is criticised, dismissed and forgotten.
The report understandably focuses heavily on China, the world’s second largest economy. Yet, given that China’s current account surplus has disappeared and its reserves are not increasing, the case for the strong focus on China currency and external issues is weak. A smarter approach is needed, delving into the issues described above that are more critical to China’s future and the global economy’s.
The Treasury focuses on the top 12 US trading partners as capturing the bulk of US trade. But beyond the 12 are several Southeast Asian economies – Singapore, Vietnam, Malaysia, Hong Kong, Thailand. The combined current account surplus of these countries in 2017 was $141.5bn. The Treasury should expand the list of trading partners examined to 20 to include these major economies. As Senator Everett Dirksen allegedly said, ‘A billion here, a billion there, and pretty soon you’re talking real money.’
To get on the monitoring list, an economy must meet two of the three criteria. The Treasury treats the three as having equal weight the three. This results in perverse outcomes. A material current account surplus and persistent intervention are far more important. Almost all economists dismiss the relevance of bilateral balances. The three criteria ought to be reweighted.
India was on past monitoring lists because of a large bilateral surplus and a build-up in reserves. But India runs a current account deficit. It is difficult to argue a country with a current account deficit is mercantilist or pursuing unfair currency practices. Taiwan’s bilateral surplus with the US at the time of the last report was under $20bn and its intervention under 2% of GDP. Hence, Taiwan was not on the monitoring list, despite having a massive current account surplus of more than 14% of GDP. Taiwan’s surplus is persistent; its intervention over the years has been enormous.
The Treasury should also take China off the monitoring list. Again, China’s current account surplus has disappeared. Intervention is scant. Yet the Treasury keeps China on the list for meeting one, not two criteria – a large bilateral surplus.
Recent foreign exchange reports lament that currency movements have not been in a direction that reduces the US’s external deficits. In 2018, the Fed raised rates as the economy strengthened, while the administration’s tax cuts sent the fiscal deficit soaring, underpinning yields. Unsurprisingly, the dollar rose. The flip side – currencies fell against the dollar. An honest report would recognise that the US policy mix, particularly fiscal policy, was a main reason for the dollar’s rise, not actions by trading partners.
The Treasury foreign exchange report is a strong document, written by first-class civil servants. It could be even stronger by implementing the recommendations above.
Mark Sobel is US Chairman of OMFIF.