President-elect Donald Trump’s protectionist rhetoric might sound like a major policy shift for the United States, but the fact is that the U.S. has been moving in that direction for years. The main target, under the current administration of President Barack Obama and the future one of Mr. Trump, is the Asian economies.
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In April 2016, the U.S. Treasury Department released its latest “monitoring list” of major foreign trading partners that engage in allegedly “unfair” currency practices. The semi-annual reports, entitled “Foreign Exchange Policies of Major Trading Partners of the United States,” have been published since 1988 as a part of the Omnibus Trade and Competitiveness Act passed by Congress.
Normally the report gets little attention, but this year, perhaps, there is more reason to explore this rather obscure corner of U.S. monetary diplomacy. There can be no doubt that the recently finished election campaign has nudged both Republicans and Democrats in a protectionist direction. President-elect Trump was particularly vocal, accusing China of “currency manipulation” and proposing a 45 percent tariff on Chinese goods.
The April report puts five countries on the monitoring list: China, Germany, Japan, South Korea and Taiwan. The choice is rather bizarre since Germany belongs to a currency union – the euro – and is hardly able to “manipulate” exchange rates. Furthermore, three other countries on the list – Japan, South Korea and Taiwan – have free-floating exchange rates and hence by definition cannot be manipulating their currencies.
In fact, Japan, Taiwan and South Korea at the moment all have inflation significantly below 2 percent (the official target of the South Korean and Japanese central banks). As such, there are good arguments that all three countries should have a less restrictive monetary stance, which would weaken their currencies from today’s levels.
The U.S. is exporting tighter monetary policies, adding to the already strong global deflationary trend
The currency report sends a very clear signal to the five countries on the monitoring list that they could be targeted by protectionist measures if they do not take steps to curb potential currency depreciation.
There is one major problem with this: it forces U.S. trade partners to follow a tighter monetary stance than would otherwise be the case were they not threatened by retaliatory tariffs.
The policy already seems to be working. Since the report was published, the currencies of Japan, South Korea and Taiwan have all appreciated against the U.S. dollar. This means the U.S. has succeeded in exporting tighter monetary policies, which will add to the already strong deflationary trends in the global economy and push down economic growth.
Ultimately, the U.S. Treasury’s currency report is nothing other than a tool for protectionist-minded policymakers. If this is what we get from the supposedly free-trade oriented Obama administration, just imagine the possible horrors to come under President Trump.