I’ve done a number of posts (here and at MoneyIllusion) pointing to the increasing tendency of the US to bully smaller countries. One of the worst aspects of these policies is the double standard that is applied. Simply put, the US does not adhere to the policies that we demand of other countries. We insist that other countries adhere to our foreign policy objectives, such as sanctions, but refuse to adhere to the policies of our friends and allies. The US punishes other countries for being tax havens, while ignoring the enormous international flow of funds into US shell corporations. We sign trade agreements and then ignore the provisions.
Today’s Financial Times reports another example of US bullying:
The Trump administration has proposed punitive duties on countries that artificially lower their currencies — a sweeping trade policy tool that could be used against US allies as well as adversaries such as China. . . .
“Foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses,” said Wilbur Ross, the US commerce secretary. “This proposed rulemaking is a step toward implementing President Trump’s campaign promise to address unfair currency practices by our trading partners.”
As you might imagine, the sanctions applied to countries that “manipulate” their currencies will not apply to the US. Indeed President Trump is currently pushing the Fed to manipulate the dollar lower:
President Donald Trump said Saturday that the U.S. dollar is too strong and took a swipe at Federal Reserve Chairman Jerome Powell as someone who “likes raising interest rates.”
In fact, the only manipulation that hurts workers is not foreign currency depreciation (as Trump and even many economists assume) rather it is contractionary monetary policies that appreciate a currency and reduce NGDP. The tight Japanese and European monetary policy of 2008 hurt American workers.
All central banks manipulate their currencies. That’s their job. The Treasury will undoubtedly be asked to come up with a coherent definition of currency manipulation, and undoubtedly will fail. The current criterion used by the Treasury includes bilateral trade deficits, which no respectable economist takes seriously. Nothing good will come out of this initiative (which seems to have bipartisan support):
One concern with such provisions has always been that if applied with reciprocity, currency provisions could constrain the Federal Reserve, or undermine its independence. Another is that it could invite legal challenges at the World Trade Organization. Yet another is that there is no agreed upon method to measuring undervaluations.
In any case, some analysts say such a US step could be hugely destabilising to the world economic order at a time when it is already under strain. “Were this to happen, it would be a highly significant and corrosive development and a major black eye for the US and the international monetary system,” said Mark Sobel, a former senior US Treasury official.
READER COMMENTS
Richard A.
May 28 2019 at 11:47am
Trump is a protectionist who is looking for any excuse to increase trade barriers. It will be WTO illegal to increase tariffs on a country simply because we declare their currency undervalued.
Rebes
May 28 2019 at 3:56pm
Reminds me of the pinnacle of double standards, the Foreign Corrupt Practices Act (FCPA).
Gordon
May 28 2019 at 6:19pm
I have yet to see any Wall St analyst or any reporter in the financial press display any understanding of the difference between nominal and real exchange rates. And because they lack this understanding, they don’t realize the level of incompetence of Team Trump on this issue much less the hypocrisy. Also, they don’t seem to realize that Trump’s tariff increase caused a change in the exchange rate between the yuan and the dollar and this is all on Trump. He and his trade advisers are always complaining about changes in exchange rates but they hilariously lack the competence to know the role they have played in causing the yuan to depreciate against the dollar.
Michael Rulle
May 29 2019 at 8:32am
Well, you framed this short note as if it really were about “bullying” so I will respond in that spirit. I hypothesize you prefer a world without willful currency manipulation——which is fine with me and agree if so. I also prefer as close to a tariff free world as is practical. But as far as one way foreign policy is concerned, that is the nature of foreign policy. Should we “let” Iran or North Korea have nuclear weapons because we do? You might say yes, in which case that would be naive in my view. If you say no, then that too can be called bullying. I am sure you understand the point—-we live in a nation state world. Even the Star Trek world had enemies!
Scott Sumner
May 29 2019 at 1:18pm
Michael, I don’t understand your comment. The previous agreement with Iran was being adhered to. Trump walked away from the agreement, and this has caused Iran to partially re-start their program. And Trump doesn’t seem to be even trying to stop North Korea from getting nukes. Even Trump’s advisors are appalled by his frequent defenses of Kim. Obama was much tougher on North Korea than Trump.
So I honestly have no idea what point you are trying to make. I am criticizing Trump’s specific policy, not the general wisdom of trying to prevent the spread of nuclear weapons.
But again, my real complaint is not with Trump’s policy toward Iran, it’s his attempt to punish our allies if they believe a different approach is more effective. That’s bullying.
TMC
May 30 2019 at 5:16pm
“The previous agreement with Iran was being adhered to. ”
I don’t think anyone really believes this. There have been numerous reports of violation, from our agencies as well as German. From test firing missiles to having a secret centrifuge plant that was fully functional as we pulled out of the treaty.
Here’s a quote from an Iranian: “The Iran Deal made it possible for us to get rid of the 60-year-old Russian-made reactor in Arak and redesign the reactor to produce plutonium. We could not produce plutonium used to make bombs with the old reactor we had. Prior to signing the deal, we had designed our own reactor, but we were not sure if it would work. One of our conditions was that P5+1 scientists certify our designed reactor and, because of the JCPOA, American and Chinese experts confirmed that our own designed reactor is accurate and will work. This was a significant achievement for us.”
https://www.fairobserver.com/region/middle_east_north_africa/iran-nuclear-deal-violations-compliance-middle-east-news-11010/
We not only aided their nuclear ambitions, but transferred hundreds of billion to help them pay for it and all their other terrorist activities.
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