The Currency Manipulation Report and the Depreciation of U.S. Credibility

At a time when the administration wants to convince Vladimir Putin that the U.S. has the will to employ potent economic tools to further its diplomatic objectives, a 34-page document that the Treasury Department delivered to Congress on April 15 doesn’t help our credibility.

The “Semiannual Report to Congress on International Economic and Exchange Rate Policies” epitomizes many of the reasons why rulers in Beijing, Moscow, and elsewhere are happy to have us say what we will, secure in the knowledge that once we’re done talking, they will be free to do what they please.

The report:

1. Is a work of political theater whose lines are written for a domestic audience
2. Enables Congress to claim that it is holding the administration accountable, and provides a twice-yearly opportunity for Senators and Representatives to stand before microphones and wax indignant without actually doing anything
3. Deprives the administration of the aforementioned, all-important credibility, by requiring its authors to find new ways every six months to say that something that walks like a duck and talks like a duck just maybe, perhaps, might be considered some sort of winged creature but by no means should be called a duck
4. Portends grave penalties for countries deemed currency manipulators, when the actual consequences of that label – which hasn’t been applied since 1994 – aren’t meaningful

The document is a product of the Omnibus Trade and Competitiveness Act of 1988, in which lawmakers required the administration to provide a twice-yearly report to Congress on other countries’ exchange-rate policies. The idea was to name and shame countries that artificially depressed the value of their currency, thus boosting their own exports, making American merchandise unduly expensive in their markets, and generally harming American jobs and trade competitiveness.

The report was taken relatively seriously for the first few years, and at different points between 1988 and 1994, China, Taiwan, and South Korea were deemed currency manipulators. That designation prompted negotiations that – particularly in the cases of Taiwan and South Korea – yielded at least temporary improvements.

Since then, however, national newspapers have become accustomed to running a headline each spring and fall along the lines of “Treasury Again Declines to Name China a Currency Manipulator.” These semi-annual non-events have occurred despite economists’ estimates that in recent years the renminbi has been under-valued by 25 percent or more relative to the dollar.

By all accounts, China has taken a number of steps in the right direction of late. They include its announced intention to reduce intervention by its central bank, the People’s Bank of China (PBOC); its decision at last November’s Third Plenum of the 18^th Chinese Communist Party Congress to “perfect the market-based renminbi exchange rate formation mechanism;” and its broadening of the band in which the renminbi, or RMB, is allowed to trade each day. The PBOC’s loosening of the reins contributed to the RMB appreciating 2.9 percent versus the dollar last year.

As welcome as those developments are, no one in Washington would presume to claim that U.S. pressure was the primary reason for the policy changes. Rather, Beijing’s prudent and patient leaders acted on their own timeline based on their own calculations of their country’s best interests. Nor has all the movement been in one direction; through the first months of 2014, the RMB has depreciated by 2.68 percent, with central bank intervention evidently a factor.

So as Treasury officials sat down to pen their latest mandated missive to Congress – this one covering the second half of 2013 – they found indications that the RMB continues to be under-valued and that China is acting to perpetuate that under-valuation. As they wrote in the report:

• “China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8 trillion in reserves, which are excessive by any measure. This suggests continued actions to impede market determination” [of the exchange rate].
• “The Chinese authorities have been unwilling to allow an appreciation large enough to bring the currency to market equilibrium, opting instead for a gradual adjustment which has now been partially reversed.”
• “There are a number of continuing signs that the exchange rate adjustment process remains incomplete and the currency has further to appreciate before reaching its equilibrium value….All of these factors indicate a RMB exchange rate that remains significantly undervalued.”
• “In the month prior to the band widening [affecting the range within which the renminbi is allowed to trade], the PBOC took measures, including reported heavy intervention, to significantly weaken the RMB and push it away from the most appreciated edge of the previous band.”

Despite that litany, the report’s authors informed Congress that, “Treasury has concluded that no major trading partner of the United States met the standard of manipulating 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 as identified in Section 3004 of the Act during the period covered in the report.”

The verdict must have come as a massive relief to the executives of the PBOC and other central banks. After all, had they been named currency manipulators, U.S. law mandates that Treasury pursue negotiations at the IMF or directly with the offending country in an effort to set matters right. Just imagine the shock and awe they would have experienced from that exercise of raw American power! Lest those tempted to transgress become too complacent, however, they should know that Treasury remains ever-vigilant. In terms of the renminbi and the factors affecting its valuation, Treasury assured Congress that, “We will continue to monitor these issues closely going forward.”

That sarcasm is directed not at Treasury officials, who are ever-vigilant, but rather at the untenable position in which they have been placed by a congressional mandate to report and countervailing diplomatic considerations that preclude plain-speaking.

The situation is akin to a police officer testifying in court: “I observed the suspect approach the house shortly before 3 a.m. He was wearing dark pants, a dark sweater, and a ski mask. He was carrying a flashlight and crowbar. I watched as he jimmied a ground-floor window with the crowbar and climbed into the house. Approximately five minutes later, I watched him climb back out through the window – carrying jewelry, two wallets, and an iPhone – and run down the street. However, I would not term this a burglary. Rather, I would say that the suspect’s notions of property rights are fundamentally misaligned with societal norms.”

In October 2011, the Senate voted 63-35 to approve a bill introduced by Sen. Charles Schumer (D-NY) and others that would have given the Treasury less wiggle room in determining whether a country was manipulating the value of its currency for economic advantage. The measure also would have imposed tariffs on goods from countries deemed to be manipulators. Both House Republicans and the Obama administration opposed the measure, largely out of fear that it could have triggered a trade war. Like similar measures introduced in past years, the bill went nowhere.

In the 26 years since Congress laid this reporting obligation on Treasury, we’ve witnessed American power reach a zenith and then steadily decline relative to China in an increasingly multi-polar world. Despite those changed circumstances, despite an ongoing unwillingness to “tell it like it is,” and despite an even greater unwillingness (arguably advisable in the larger scheme of things) to impose meaningful penalties for currency manipulation, Treasury continues to issue reports and elected officials continue to troop in front of the cameras to talk about protecting American jobs.

It’s bad enough when a play has an unsatisfactory ending. Why keep staging revivals just so the actors can hear themselves recite their lines to strictly local audiences that know from the start how the “drama” will turn out, and who have long since stopped finding the performers believable?