WASHINGTON – President Donald Trump’s renewed focus on what he calls “unfair” exchange rates could presage a new global battlefield that has the potential to do great damage to the world economy.
Trump has spent two years attacking the underpinnings of the global trading system, launching multifront tariff wars on allies and adversaries alike while complaining that the United States has been taken advantage of.
Under a proposed new rule that could take effect as early as next month, the U.S. may impose punitive tariffs on any country it determines is manipulating its currency to make its products more competitive than American goods.
Trump has frequently attacked eurozone countries like Germany for benefiting from a relatively weak currency.
On Tuesday he criticized European Central Bank President Mario Draghi’s comments that rate cuts or asset purchases may be needed if eurozone inflation does not accelerate. “They have been getting away with this for years,” Trump said, “along with China and others.”
As this incident shows, once-mundane monetary policy moves could be used as ammunition to justify retaliation. Economists warn this opens the door to a damaging global currency war pitting everyone against everyone.
If Trump follows this new path, likely with the backing of Commerce Secretary Wilbur Ross, a trade hard-liner, the United States would be vulnerable to retaliation when the Federal Reserve eventually cuts the benchmark interest rate, as Trump has demanded.
Central banks use interest rate cuts to spur a sluggish economy, weakening a currency’s value in exchange for boosting exports, which then power economic growth.
Mark Sobel, who served in the Treasury for years under Republican and Democratic administrations, said he has “serious reservations” about the new plan. In his submission to the Commerce Department, he said the rule change is “fundamentally flawed … and could prove counterproductive and harm the U.S. economy.”
Over the years, lawmakers and presidents from both the Democratic and Republican parties have floated plans to go after governments that manipulate their exchange rates to compete in the global trading system.
But the efforts — mostly aimed at China — have always been resisted and eventually abandoned, in part because they were viewed as a violation of global trade rules.
China has not been intervening in markets in recent years except to keep the yuan from falling, and the currency has actually gained in value since the financial crisis.
Currently, the U.S. Treasury issues a semiannual report scrutinizing possible currency manipulation. But since the mid-1990s, the department has never labeled a country as a manipulator, even in the years when China was very actively keeping the yuan weak.
Now the Commerce Department has moved to wrest control from the Treasury by proposing a rule modification that would allow it to treat currency manipulation the same as it would a foreign government subsidy that harms American manufacturers.
If approved, Commerce could impose tariffs to offset the weaker exchange rate against the dollar. The department is accepting comments from the public until Thursday, and could implement the change after that.
According to the proposal, Commerce said it would defer to Treasury’s evaluation of whether a currency is undervalued, “unless we have good reason to believe otherwise.”
That ambiguity raises red flags for economists, many of whom believe Commerce does not have the technical expertise to make that evaluation.
The plan “would grant the Commerce Department excessive discretion,” Sobel said.
It is notoriously difficult to calculate objectively whether a particular currency is undervalued and, if so, by how much. For years, the Peterson Institute for International Economics produced a report evaluating exchange rates but stopped “because they were completely arbitrary,” the think tank’s chief, Adam Posen, told reporters recently.
“China should have been hammered hard in the early, mid-2000s for massive manipulation of the currency,” Posen said, but to do so now is “pretty close to absurd.”
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