US President Donald Trump has again demonstrated his confusion on currency issues with his ‘America first’ executive order on trade policy.
Section 2a of the order shows this clearly: ‘The Secretary of Commerce, in consultation with the Secretary of the Treasury and the United States Trade Representative, shall investigate the causes of our country’s large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits.’
The US current account deficit is predominantly a macroeconomic phenomenon, reflecting the country’s savings and investment gap. America’s huge and unwise fiscal deficits, which Trump’s plans threaten to exacerbate, will add to that gap.
The dollar is super strong. The US economy is stronger and the Federal Reserve’s interest rate cut path is far shallower than Europe’s, sucking in capital. Threatened tariffs are further pushing the dollar up, aggravating the current account deficit.
Of course, given Europe’s weak growth and China’s massive headwinds, there clearly is a foreign dimension to the deficits. But first and foremost, American deficits are made in America. Foreigners can’t fix that.
Trump assigns the investigation of persistent US deficits to the Commerce Department in consultation with the Treasury and US Trade Representative. But Commerce doesn’t have responsibility for macroeconomic policy. Nor does USTR. In contrast, the Secretary of the Treasury is the chief economic spokesperson for the administration. This order is therefore a slap in the face of the Treasury and Secretary Scott Bessent.
Treasury and foreign exchange
Section 2e of the order is more conventional, assigning responsibility solely to the Secretary of the Treasury: ‘The Secretary of the Treasury shall recommend appropriate measures to counter currency manipulation or misalignment that prevents effective balance of payments adjustments or that provides trading partners with an unfair competitive advantage in international trade, and shall identify any countries that he believes should be designated as currency manipulators.’
But what should one watch out for?
The standard currency playbook under Presidents Bill Clinton, George W Bush, Barack Obama and Joe Biden ran through the Treasury semi-annual foreign exchange report. Under a 2015-16 revision to the report’s authorisation, in assessing whether a country ‘manipulated’ its currency or pursued harmful currency practices, the Treasury was to analyse more quantitatively if the country: 1) was a major trading partner and had a large bilateral surplus with the US, 2) a material current account surplus and 3) was adding significantly to reserves in a sign it was artificially holding its currency down.
Trump heavily focuses on the first point, though most economists largely dismiss the importance of bilateral balances. In 2019, Trump ordered the Treasury to designate China as a currency manipulator, even though China only ran afoul of one of the three criteria. Later it designated Vietnam and Switzerland for manipulation when they ran afoul of the three criteria.
The designations in and of themselves were greeted by a yawn from markets and barely caused a ripple. Aside from China, which has only triggered the bilateral balance criterion in recent years, other countries running afoul of two criteria are placed on a monitoring list.
What options are available to Treasury and the administration?
The threat of being designated a manipulator and being on the monitoring list can prod smaller countries to hold bilateral discussions with the Treasury and make accommodations. But the kinds of remedies proposed in the legislation for manipulators are not that impactful. Cutting off Export-Import Bank financing may not be meaningful to China, for example. International Monetary Fund exchange rate analytics may offer interesting insights but, when it comes to ruthless truth-telling, the IMF is a toothless tiger.
There is no reason a Trump Treasury needs to stick with its ‘three strikes’ practice from the first term, plus the criteria can be fiddled. For example, the material current account surplus criterion was defined as 3% under the Obama administration, 2% under Trump 1.0 and 3% under Biden.
China’s current account surplus – regardless of what the IMF tells us – is probably back up to 3% or higher and the bilateral balance criterion is met. Two out of three might do the trick for a Bessent Treasury under a newly aggressive Trump administration. According to the November 2024 Treasury FX Report, Vietnam, Canada and Mexico are poor candidates for designation.
Of course, Trump may impose tariffs against many countries for whatever reason, currency-related or not.
For countries posing currency issues, it is worth recalling that countervailing duties for currency undervaluation were put forward towards the end of Trump 1.0 and imposed on Vietnamese tire production. The clock ran out before they could be imposed on Chinese products. Currency undervaluation CVDs could offer a targeted vehicle for Trump 2.0 to address currency concerns.
They are, however, fundamentally misguided. There is no scientific way to estimate equilibrium exchange rates or deviations from equilibrium. Deriving a bilateral equilibrium exchange rate from a multilateral one is highly problematic. Currencies are impacted by capital flows, swamping current account flows — the dollar is especially affected by capital account transactions. These considerations involve macroeconomic policy. If the dollar is now overvalued, it is more a ‘Made in the USA’ story and the flip side of that is other currencies being undervalued, through little fault of their own.
What are the possible outs?
Under the Trans-Pacific Partnership during the Obama administration, tackling currency manipulation was a principal negotiating objective set by Congress for approval of Trade Promotion (fast track) Authority. Finance ministers reached a joint declaration that was not part of TPP or part of its dispute resolution, setting up possible finance minister discussions on macroeconomic and financial developments in the TPP.
The United States-Mexico-Canada Agreement included a currency chapter. It required the countries to affirm their commitment to market exchange rates and adhere to IMF prohibitions against manipulation.
In both cases, though, the US push to tie currency understandings to trade deals met resistance from others. The provisions agreed were weak and often just recognised existing practice.
Transparency on currency policy understandings featured prominently in Trump 1.0. The China Phase One deal had a currency chapter, which committed the parties to do what they were already doing. The trade deal with Korea included a side agreement. Vietnam was pushed to give such information to the US. Chinese currency practices in particular are highly opaque and there is still room for far greater improvements on this front. The progress on transparency was welcome.
Any Trump 2.0 push on currency policy is likely to stir up a hornet’s nest within the administration, let alone internationally. But it will not change the underlying US macroeconomic dynamics driving imbalances. Foreign countries have engaged in harmful currency practices, but today’s woes are mainly made in the US. The Treasury’s immediate tools for tackling harmful currency practices are weak. If Trump 2.0 is to deploy currency sticks, countermeasures in the trade realm are the likeliest tool of choice.
Blaming the foreigners will create some ugly recriminations and big US trade deficits aren’t going away.
Mark Sobel is US Chair of OMFIF.
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