By Dr. Jeffrey I. Kim
The U.S. economy is recovering visibly. Numerous jobs are being created. Nevertheless, the prospects for the U.S. trade balance are not so bright. Its trade deficit increased from $504.8 billion in 2016 to $568.4 billion in 2017. The deficit size has been expanding since 1975.
Such a trend will continue and trade disputes between the U.S. and other countries will also continue. Then President Donald Trump's rhetoric regarding trade retaliation is likely to intensify.
Trump expressed his strong will to make America great again in his inaugural speech in February 2017. During the election campaign, he accused China of cheating its trading partners and threatened to impose tariffs on imports.
Treasury Secretary Steve Mnuchin asked IMF Managing Director Christine Lagarde to provide a candid analysis of foreign exchange (FX) policies in its 189 member countries. In April 2017 she said in an interview, "You cannot just identify one particular country because the whole system works together."
Professor Jeffrey Frankel of Harvard University stated in "China-US Focus" dated April 9, 2015, that "over the preceding 10 years, the People's Bank of China did a lot of intervention in the foreign exchange market but not any longer. Its central bank actually intervened to dampen the depreciation of the renminbi."
China lowered its foreign-reserve holding from $3.99 trillion in July 2014 to $3.84 trillion in January 2015. Since then the accusation of China as a currency manipulator has subsided.
The U.S. Congress enacted the Omnibus Trade and Competitiveness Law in 1988. This law stipulates that "the secretary should consider whether countries manipulate the exchange rate and observe such manipulation occurring, the secretary shall initiate negotiations with such foreign countries." Apparently this stipulation was not strong enough. By this law, Treasury is required to submit a currency report to Congress every April and November.
Under the Obama administration in 2015, Congress enacted a new law, the Trade Facilitation and Trade Enforcement Act. This law was to prevent partner countries from seeking unfair practices in FX policy.
On April 13, 2018, the Treasury's third report was presented to Congress. This report analyzed the exchange-rate policies of 13 major trading partners. The report concluded that no partner country required an "enhanced" analysis. But it placed six countries ― China, Germany, Japan, South Korea, Switzerland and India ― on the "monitoring" list considering that these countries need to be continually monitored.
The U.S. criteria for labeling the country for "enhanced analysis" are: (1) A bilateral trade surplus of at least $20 billion with the U.S., (2) A current account surplus of at least 3 percent of GDP, and (3) Net purchases of foreign currency totaling at least 2 percent of GDP.
Any country that has met all the three criteria is designated as a country that requires an "enhanced" analysis. Any country that has met at least two out of the three criteria is put on the "monitoring" list.
Korea met criteria (1) and (2), but did not meet criterion (3) and the country was put on the "monitoring" list. It should be noted, however, that the ratios and "$20 billion" in the criteria are somewhat arbitrary and they may change as the underlying conditions evolve. Korea can easily reduce its trade surplus with America to below $20 billion.
Disputes over FX policies among academicians, policymakers, and politicians may continue.
To lessen such disputes, they should agree on at least the following four points: (1) Impact of the change in the exchange rate on trade balance is getting weaker as the share of imported inputs in total exports of a country is expanding; (2) As the number of firms participating in the global supply chain increases, assessing the exchange rate effects is getting harder; (3) A partner country's expansionary fiscal policy improves America's trade balance, and (4) A partner country's tighter monetary policy makes the dollar weaker.
Korea is not a reserve-currency country but it has seldom been out of line in FX policy. The Korean economy was hit hard by the 1997 Asian financial crisis. It was just a year after Korea liberalized its capital account.
However, it swiftly overcame the economic hardship by undertaking drastic structural reforms and adopting a sound FX policy. Korea has introduced the floating exchange rate system and maintained an appropriate level of foreign reserves.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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Such a trend will continue and trade disputes between the U.S. and other countries will also continue. Then President Donald Trump's rhetoric regarding trade retaliation is likely to intensify.
Trump expressed his strong will to make America great again in his inaugural speech in February 2017. During the election campaign, he accused China of cheating its trading partners and threatened to impose tariffs on imports.
Treasury Secretary Steve Mnuchin asked IMF Managing Director Christine Lagarde to provide a candid analysis of foreign exchange (FX) policies in its 189 member countries. In April 2017 she said in an interview, "You cannot just identify one particular country because the whole system works together."
Professor Jeffrey Frankel of Harvard University stated in "China-US Focus" dated April 9, 2015, that "over the preceding 10 years, the People's Bank of China did a lot of intervention in the foreign exchange market but not any longer. Its central bank actually intervened to dampen the depreciation of the renminbi."
China lowered its foreign-reserve holding from $3.99 trillion in July 2014 to $3.84 trillion in January 2015. Since then the accusation of China as a currency manipulator has subsided.
The U.S. Congress enacted the Omnibus Trade and Competitiveness Law in 1988. This law stipulates that "the secretary should consider whether countries manipulate the exchange rate and observe such manipulation occurring, the secretary shall initiate negotiations with such foreign countries." Apparently this stipulation was not strong enough. By this law, Treasury is required to submit a currency report to Congress every April and November.
Under the Obama administration in 2015, Congress enacted a new law, the Trade Facilitation and Trade Enforcement Act. This law was to prevent partner countries from seeking unfair practices in FX policy.
On April 13, 2018, the Treasury's third report was presented to Congress. This report analyzed the exchange-rate policies of 13 major trading partners. The report concluded that no partner country required an "enhanced" analysis. But it placed six countries ― China, Germany, Japan, South Korea, Switzerland and India ― on the "monitoring" list considering that these countries need to be continually monitored.
The U.S. criteria for labeling the country for "enhanced analysis" are: (1) A bilateral trade surplus of at least $20 billion with the U.S., (2) A current account surplus of at least 3 percent of GDP, and (3) Net purchases of foreign currency totaling at least 2 percent of GDP.
Any country that has met all the three criteria is designated as a country that requires an "enhanced" analysis. Any country that has met at least two out of the three criteria is put on the "monitoring" list.
Korea met criteria (1) and (2), but did not meet criterion (3) and the country was put on the "monitoring" list. It should be noted, however, that the ratios and "$20 billion" in the criteria are somewhat arbitrary and they may change as the underlying conditions evolve. Korea can easily reduce its trade surplus with America to below $20 billion.
Disputes over FX policies among academicians, policymakers, and politicians may continue.
To lessen such disputes, they should agree on at least the following four points: (1) Impact of the change in the exchange rate on trade balance is getting weaker as the share of imported inputs in total exports of a country is expanding; (2) As the number of firms participating in the global supply chain increases, assessing the exchange rate effects is getting harder; (3) A partner country's expansionary fiscal policy improves America's trade balance, and (4) A partner country's tighter monetary policy makes the dollar weaker.
Korea is not a reserve-currency country but it has seldom been out of line in FX policy. The Korean economy was hit hard by the 1997 Asian financial crisis. It was just a year after Korea liberalized its capital account.
However, it swiftly overcame the economic hardship by undertaking drastic structural reforms and adopting a sound FX policy. Korea has introduced the floating exchange rate system and maintained an appropriate level of foreign reserves.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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