Commentary on Political Economy

Tuesday 20 April 2021


The U.S. Has a Clear Warning for Emerging Markets

America once encouraged its trading partners to export their way to prosperity. Judging by the latest Treasury report, that won't be tolerated indefinitely.

Change of tune.
Change of tune. Photographer: Chip Somodevilla/Getty Images North America

The Treasury Department has a warning for the emerging world: The export-your-way-to-prosperity template has fallen out of favor. Once thought to be in U.S. interests — as a way of getting plentiful cheap goods — this model of development is now meeting more skepticism. The message for Asia should be loud and clear, even if some economies got a pass last week. 

In its semiannual assessment of trading partners’ foreign-exchange policies, Treasury stopped short of labeling Taiwan, Vietnam and Switzerland as currency manipulators, even though they met the criteria. In normal times, they would have been branded with a Scarlet M for deliberately holding their currencies down. But officials couldn’t determine whether their less-than-ideal practices were done to seek a trade advantage, or simply to buttress markets and alleviate recession. The pandemic skewed capital flows globally, and many countries — the U.S. among them — responded in kind. This time, the trio got away with a rap on the knuckles. The softer approach is a shift from the Trump administration, which tagged Hanoi and Bern as manipulators, and admonished a bunch of others, including India, Thailand, Singapore and South Korea. 

At its inception in the late 1980s, the Treasury report was mainly perceived to be targeting Japan. Over time, the focus shifted to China, the next strategic and commercial competitor, whose authorities play a big role in managing the nation’s currency.

Yet the guts of last week’s publication expose a world view that stretches far beyond Beijing. Since a 2015 law added criteria to be measured, yawning current-account and bilateral trade surpluses have been in the crosshairs as much as the intricacies of foreign-exchange transactions. It’s not enough to simply say country X sold Y dollars worth of its currency over Z months and is naughty. Officials are also looking at the size of a current-account surplus, and whether it is at least 2% of gross domestic product. They also examine the bilateral trade surplus. If the gap is at least $20 billion over a 12-month period, that’s a mark against you. Hit three of those, and you’re a manipulator. Check two, and you make the so-called monitoring list. This is how pals like South Korea, Germany, Italy, Singapore, Thailand, Malaysia, Japan and India get put on watch, a kind of purgatory. (China is there right now.) 

The last couple of reports included a review of some errant trading partners’ development history over the past few decades. These examine how these economies wooed manufacturing from abroad and wove themselves into critical positions in global supply chains, which started winding through Asia in the 1980s. Taiwan was scrutinized in the latest publication, while Vietnam was featured in December’s, when it was called a manipulator. The subjects of enhanced analysis tend to be in the dog house.

These briefs could also fairly describe the way Asian economies rose from poverty: attracting foreign direct investment (often thanks to low-cost labor, but also via tax breaks), committing to infrastructure and establishing proximity to big markets. This is what has enticed multinational companies, many of them headquartered in the U.S., to develop a foothold in the region. Because rapidly industrializing Asian countries were so dependent on trade, they loathed expensive exchange rates. And because the ultimate destination of these goods was store shelves in California or factory lines in the Midwest, it was easy for officials and politicians to look the other way. That model has eroded in the political climate.

What price does the U.S. extract in an effort to get currency sinners to change? It’s a bit squishy. The designation, if and when it comes, carries no immediate sanctions. The law requires Treasury to engage with manipulators to address the matter. Penalties, including exclusion from U.S. government contracts, could be applied after a year, unless the label is removed. It can also be used as a cudgel by other agencies with their own priorities and constituencies. Last year, the U.S. Trade Representative’s office probed whether remedies were needed to correct cheap valuations of Vietnam's currency, the dong.

By doing nothing this time around, Treasury risks encouraging the behavior it seeks to change. Taiwan hinted at the dilemma last month when central bank Governor Yang Chin-long said that its large trade surplus with the U.S. is due to strong demand for semiconductors, rather than any unfair advantage from currency intervention. “If they want to reduce our trade surplus with them, then we could just stop selling them our chips,” Yang joked to lawmakers, “But they need them!”

Yang might be right, but for Taiwan — a constant subject of war-game scenarios based on a possible Chinese attack  — the strength U.S. friendship isn’t worth testing.

Here’s where Vietnam’s experience is instructive. It has gone from poster child for the trade war-era relocation of supply chains from China, to drawing fire from powerful voices in industry and government, worried that American producers are being undercut. Treasury’s December report was symptomatic of that evolution. For a country that thought it would benefit from manufacturing flight from China — the very thing 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. The gray zone matters. If you think everything in D.C. is about China, Treasury’s last two reports suggest otherwise. It goes well beyond daily yuan-trading guidelines. A framework for economic advancement is newly under the microscope. The true test will be when the disruptions of Covid start to abate.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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