Treasury Secretary Steven Mnuchin in a conversation with International Monetary Fund (IMF) Director Christine LaGarde “underscored his expectation that the IMF provide frank and candid analysis of the exchange rate policies of IMF member countries,” according to a department spokesperson.
That might sound innocuous, but it could actually be the beginning of a sea shift on currency manipulation and China, which is accused of devaluing the yuan to lower the price of its exports and increase the price of imports.
Mnuchin may actually be invoking 22 U.S.C. Section 5304(b), which provides that “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
Note the part that states, “in consultation with the International Monetary Fund…” In his conversation with LaGarde, Mnuchin, again, “underscored his expectation that the IMF provide frank and candid analysis of the exchange rate policies of IMF member countries…”
Since said consultation is a necessary precursor to labeling any country including China a currency manipulator, the fact that Mnuchin has apparently initiated that process is telling.
The consultation may not be entirely fruitless either, for cynics who might suggest that Mnuchin is simply going through the motions of the statute. An Oct. 2015 IMF World Economic Outlook study of 60 economies including China found that “A depreciation in an economy’s currency is typically associated with lower export prices paid by foreigners and higher domestic import prices, and these price changes, in turn, lead to a rise in exports and a decline in imports. Reflecting these channels, a 10 percent real effective exchange rate depreciation implies, on average, a 1.5 percent of GDP increase in real net exports,” which much of the increase happening in the first year.
Mnuchin might want to drill down on this conclusion and see if it might result in an Article IV determination from the IMF. Article IV of the IMF Articles of Agreement states, “each member shall… avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members…”
But as noted by the Congressional Research’s Jonathan E. Sanford in 2011 “Some countries claim that their exchange rate policies are not in violation of Article IV because they are not seeking to gain competitive advantage (though this may be the result of their actions) but rather to stabilize the value of their currency in order to prevent disruption to their domestic economic system. To date, the IMF has not publicly challenged this statement of their objective.”
And the IMF may never do so, lacking any sovereign means — thank goodness — of enforcing its charter.
But Mnuchin will be well within his authority to take whatever data the IMF provides, and under U.S. law, cited above, “If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”
Now, cynics may say, well, all the law allows is for negotiations to occur. If such negotiations they are not in China’s interest, why would they cooperate?
The answer could lay in another institution that both the U.S. and China participate in, the World Trade Organization, which has rules against subsidies but has not addressed currency exchange rates — yet.
But it could, if the U.S. Trade Representative indicated that if it isn’t addressed, the U.S. might withdraw under Article XV of the WTO charter, something President Donald Trump has already threatened.
On July 24, 2016, on NBC’s Meet the Press, Trump declared, “Then we’re going to renegotiate or we’re going to pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster.”
On that count, the U.S. is under no obligation to provide other countries access to domestic markets. So, for those who argue the U.S. has no leverage is such a negotiation, the answer coming from Trump and his Treasury Secretary, Mnuchin is, think again.