The United States has a clear warning for emerging markets
The Treasury Department has a warning for the emerging world: the export your way to prosperity model has fallen out of favor. Once considered to be in the best interests of the United States – as a means of obtaining many inexpensive products – this development model is now met with more skepticism. The message for Asia should be loud and clear, although some economies were granted a pass last week.
In its biannual assessment of the exchange rate policies of trading partners, the Treasury refrained from labeling Taiwan, Vietnam and Switzerland as currency manipulators, even if they met the criteria. Under normal circumstances, they would have been marked with a Scarlet M for deliberately keeping their currencies low. But officials could not determine whether their less-than-ideal practices were aimed at seeking a business advantage or simply strengthening markets and easing the recession. The pandemic has distorted capital flows globally, and many countries, including the United States, have responded accordingly. This time, the trio get away with a hit on the fingers. The softer approach is a change from the Trump administration, which called Hanoi and Bern manipulative and berated a slew of others, including India, Thailand, Singapore and South Korea.
When it was created in the late 1980s, the Treasury report was seen primarily as targeting Japan. Over time, attention has shifted to China, the next strategic and commercial competitor, whose authorities play an important role in the management of the national currency.
Yet the guts of last week’s post expose a worldview that extends far beyond Beijing. Since a 2015 law added criteria to be measured, the gaping current account and bilateral trade surpluses are as much in the crosshairs as the intricacies of foreign exchange transactions. It is not enough to simply say that country X has sold Y dollars of its currency over Z months and that it is mean. Officials also examine the size of a current account surplus and whether it represents at least 2% of gross domestic product. They also look at the bilateral trade surplus. If the spread is at least $ 20 billion over a 12-month period, that’s a mark against you. Hit three of them, and you’re a manipulator. Check two, and you make the so-called watchlist. This is how friends like South Korea, Germany, Italy, Singapore, Thailand, Malaysia, Japan and India are warned, a sort of purgatory. (China is here right now.)
The last two reports included a review of the development history of some stray trading partners over the past decades. These examine how these economies wooed overseas manufacturing and weaved themselves into critical positions in global supply chains, which began to roam Asia in the 1980s. Taiwan has been scrutinized in the latest post, while Vietnam was featured in December, when it was called manipulative. Topics for in-depth analysis tend to be in the niche. These briefs could also fairly describe how Asian economies have emerged from poverty: attracting foreign direct investment (often through low-cost labor, but also through tax breaks), engaging in infrastructure and establish proximity to major markets. This is what prompted multinationals, many of which are headquartered in the United States, to establish themselves in the region. Because the rapidly industrializing Asian countries were so dependent on trade, they hated high exchange rates. And because the ultimate destination for these merchandise was store shelves in California or factory lines in the Midwest, it was easy for officials and politicians to look away. This model has eroded in the political climate. What price is the United States pulling in an effort to change currency sinners? It’s a little spongy. The appointment, if and when it comes, does not entail any immediate sanction. The law requires the Treasury to engage with the manipulators to fix the problem. Sanctions, including exclusion from U.S. government contracts, could be enforced after a year, unless the label is removed. It can also be used as a stick by other agencies with their own priorities and constituencies. Last year, the office of the U.S. Trade Representative investigated whether remedies were needed to correct the cheap valuations of the Vietnamese currency, the dong. By doing nothing this time around, the Treasury risks encouraging the behavior it seeks to change. Taiwan hinted at the dilemma last month when central bank governor Yang Chin-long said its large trade surplus with the United States was due to strong demand for semiconductors, rather than an unfair advantage. monetary intervention. “If they want to reduce our trade surplus with them, then we could just stop selling our chips to them,” Yang joked to lawmakers, “But they need it!”
Yang might be right, but for Taiwan – a constant subject of war game scenarios based on a possible Chinese attack – the strength of American friendship is not worth testing.
This is where the Vietnam experience is instructive. He went from showing off the relocation of supply chains from China during the trade war era to calling for powerful voices in industry and government, fearing that U.S. producers would be undermined. The December Treasury report was symptomatic of this development. For a country that thought it would benefit from a manufacturing flight from China – which Trump wanted – it was a sobering experience. Vietnam, and other former manipulators, would be ill advised to consider themselves out of the woods just because Janet Yellen balked this time around. The gray area matters. If you think everything in Washington is about China, the last two Treasury reports suggest otherwise. It goes way beyond daily yuan trading guidelines. A framework for economic progress has recently come under the microscope. The real test will be when the Covid disruptions start to ease.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News Editor-in-Chief for the Global Economy and led teams in Asia, Europe and North America.
This story was posted from an agency feed with no text editing. Only the title has been changed.
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