Trade correspondent L.C. reports:
President Trump has renewed his allegations of foreign currency manipulation at the same time as he is pushing for US manipulation. Meanwhile, the administration’s proposal to treat currency undervaluation as a countervailable subsidy has come under attack at the WTO.
On July 3rd the president tweeted, “China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for so many years.”
These comments are notable for several reasons. They suggest that the president intends to use the accusation of manipulation to pressure China and the EU in the upcoming trade talks to be held with both countries. They may be intended to scare the People’s Bank of China (PBOC) and European Central Bank (ECB) — and the Bank of Japan — out of planned future monetary easing. The US Treasury Department, however, recently concluded that no US trading partner is engaged in deliberate devaluation. The president’s accusations could also represent an effort to place blame elsewhere for the rising US trade deficit reported on the same day. Moreover, by protesting that the Fed is keeping interest rates too high, the president is setting it up to take the blame for any economic downturn.
The president reinforced these concerns on July 5th, when he responded to release of the June jobs report by saying, “If we had a Fed that would lower interest rates, we’d be like a rocket ship, but we’re paying a lot of interest and it’s unnecessary.” The following day he took his campaign to Twitter again, tweeting, “…other countries around the world doing anything possible to take advantage of the US, knowing that our Federal Reserve doesn’t have a clue! They raised rates too soon, too often, & tightened, while others did just the opposite…. Our most difficult problem is not our competitors, it is the Federal Reserve!”
The president is reacting to the extreme easy-money policies of foreign central banks, although they are not attempting to depreciate their currencies but rather to respond to sluggish economic growth. The ECB and PBOC, like the Bank of Japan, have cut rates – just like the US did over the past decade – to stimulate the economy. Indeed, ECB head Mario Draghi (soon to be replaced by Christine Lagarde) has eased very aggressively. He recently said he may cut rates again soon, for which the president denounced him even while commenting that he’d like to have him running the Fed. But the economies in question are not performing as well as the US economy is. This is a recipe for their currencies to depreciate against the dollar even without any deliberate government action.
But the president’s tweet was taken by some analysts as signaling that the US may respond to these objectionable foreign practices by copying them. It is possible the president may direct the Treasury to intervene in the foreign exchange market to weaken the dollar, especially if the Fed doesn’t cut rates as much as he wants or does cut rates but without this having an effect on currency cross-rates.
US-China negotiations stalled
When they met on the sidelines of the late June G20 Summit in Osaka, China and the US agreed to a tariff standstill and resumption of trade talks. Since then, there has been little clarity regarding what comes next.
Beijing issued just a brief statement, not addressing President Trump’s declaration that China would greatly increase purchases of US farm products nor mentioning the apparent US softening of its treatment of Huawei. US sources said the Trump administration still intends to have China change its laws, but China didn’t mention that either.
China’s Global Times did run an editorial presumably reflecting the official view, saying, “It’s not settled yet…. We have to say that the US side has a track record of flipping and flopping. The complicated power structure in US domestic politics, the disputes within the current administration, and election campaign tricks are just a few factors that could alter the US stance.” This caustic analysis of the US position in the negotiations meshes with reports that nationalist hard-liners are gaining the upper hand in Beijing as the trade tussle drags on. Those seen as soft on the US are being pilloried in the press. It is not clear if President Xi Jinping is leading or following this tendency, but he doesn’t appear to be resisting it. Most observers are warning that an escalation of the trade war is a more likely outcome in the foreseeable future than a negotiated trade deal.
There was one thing that the Chinese did make clear: they are sticking to their insistence that any final deal must include the removal of the additional tariffs that the US has imposed on China, that is, the Section 301 tariffs, and presumably the Section 232 steel and aluminum tariffs as well, although the latter impact much less trade.
This could be a problem because US officials, reportedly including USTR Lighthizer, have said in the past that they intend to maintain some tariffs on China as leverage to assure it complies with a final agreement and because the President has stated that he intends to retain the Section 301 tariffs, which he believes bring in Chinese money to US government coffers.
Meanwhile, China continues to cut its Most Favored Nation (MFN) tariffs, facilitating imports from the rest of the world while imports from the US stall under the retaliatory tariffs that will stay in effect as long as the Sections 301 and 232 tariffs remain.
So a final deal with the US is still far off. No face-to-face meetings have been set. There also continues to be some confusion over the status of Huawei. US chip makers have been lobbying against a blanket ban on their sales to Huawei. They argue that it would cause them to lose market share in China to other suppliers, weakening them and thus ultimately harming US national security. President Trump said last week that Huawei would be allowed to buy US technology but only for “equipment where there is no great national emergency problem with it.”
For an alternative view of the bilateral relationship, a hundred US China exerts from universities, think tanks, the government, and business signed an open letter published in the Washington Post that declared, as the title said, “China is not an enemy.” It stated, ‘We do not believe Beijing is an economic enemy or an existential national security threat that must be confronted in every sphere.” Many of the signees were prominent Democrats, suggesting that that party intends to be as accommodating to China as to Iran.
US unable to cool tensions between two important allies
Tokyo and Seoul are about to clash again at the WTO, this time over Japan’s new restrictions placed on the export of certain high-tech chemicals to South Korea. Seoul said on June 2nd that it intends to file a WTO complaint against the Japanese action. It is contemplating other actions as well – including diversifying suppliers, encouraging domestic production, and retaliating. Korean activists are trying to organize a boycott of Japanese products.
The outbreak of new tensions between Japan and South Korea is a blow to US diplomacy, which has for years worked for improved relations between the two US allies. It could make it more difficult for the US to promote its vision (shared with Prime Minister Abe) of a free and open Indo-Pacific and unite other countries in the region around what it tries to accomplish regarding China and North Korea. When South Korea renews tensions with Japan over historical wrongs, this tends to push it closer to China. Amid earlier Tokyo-Seoul tensions, South Korea signed a separate free-trade agreement with China, although that hasn’t insulated it from Chinese trade retaliation in response to “political” disputes.
The chemicals could have military uses and therefore be considered sensitive. In addition to requiring new export approvals, Japan is also reportedly considering taking South Korea entirely off its “white list” of countries that can purchase Japanese exports without extra security procedures. The need to apply for individual approvals is expected to delay purchases by up to three months. This could, analysts say, crimp Korea’s sale of semiconductors, a key export. South Korea’s Samsung is the world’s largest chip producer and is already faced with a softening of world demand for its processors.
Tokyo took this action in response to the failure of the two countries to settle their dispute over Seoul’s demand that Japanese companies pay compensation to Koreans who were forced to work for them during Japan’s 1910-1945 colonization. The dispute has national significance as the Koreans say the claims should be honored while the Japanese say the matter was settled by the 1965 Treaty on Basic Relations Between Japan and the Republic of Korea that restored diplomatic relations. Covert Chinese and North Korean manipulation of this issue in South Korean politics is not to be excluded.
South Korea runs a consistent and large trade deficit with Japan, largely due to its dependence on Japanese high-tech equipment and materials, so it is not surprising that Japan’s new export restrictions might spur efforts to become more self-sufficient in these areas.
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