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What are the possible direct consequences of being labelled as a currency manipulator? Yesterday, the U.S. labelled China as a currency manipulator.
Tariffs no longer being able to be used against China, what could the U.S. do, and is there a legitimate consequence in being labelled as a currency manipulator?
The US could do so many more things. All they want really. Tariffs are not their only available option. But even tariffs could still be increased a lot, say to 50% or 100% or 200% ... the sky is the limit.
However, I think the label is largely symbolic for now. International law doesn't recognize the term. It's an internal thing in US politics.
There's no direct legal implication over and above what the US has been doing already, at least according to the BBC:
The move is largely symbolic because the US is already engaged in trade discussions with China and has implemented tariffs on the country's imports.
However, it fulfils a presidential campaign promise by Mr Trump who pledged to name China a currency manipulator on his first day in office.
[...]
The move doesn't change much. Not legally speaking.
When the US Treasury labels a country a currency manipulator - as it has done here with China - the next step would normally be for negotiations to begin between the two countries. In this case, trade negotiations have already been going on for more than a year.
The process also opens the path for America to introduce tariffs. Again, that's already happening as part of Mr Trump's 'America First' approach to trade.
Under the designation, Mr Mnuchin is also expected to work with the IMF to address its concerns. It's not clear yet what that will yield.
A few days later, the IMF didn't really back up Trump's administration on this, according to Politico:
The International Monetary Fund on Friday provided little or no support for President Donald Trump’s assertion that China is manipulating its currency for an unfair trade advantage.
In an annual review of China’s economic policies, the IMF said Beijing actually took steps last year to prop up the value of its currency after the renminbi declined against the dollar between mid-June and early August 2018. [...]
IMF staff concluded the renminbi's value in 2018 was "broadly in line with medium-term fundamentals and desirable policies, i.e. not significantly over- or undervalued," James Daniel, the IMF's mission chief for China, told reporters on a call.
Two days later, Reuters wrote
China is unlikely to face serious consequences from the Trump administration’s decision to label it a currency manipulator given the apparent lack of G7 and IMF support for the move, former and current U.S. and G7 officials said.
An accord agreed by the Group of Seven of the world’s most advanced economies in 2013 says that members should consult each other before taking major currency actions.
But former and current officials said the Treasury failed to make those consultations, contradicting White House economic adviser Larry Kudlow’s claim that G7 members were on board.
European countries were astonished by the lack of coordination, one senior official of a European G7 country told Reuters, asking not to be named because they were not authorized to speak to the media.
The day after the announcement, German Finance Minister Olaf Scholz warned against stoking tensions at a time when trade conflicts were already hindering growth.
“A further escalation will only do damage,” Scholz said in a statement, adding, “Everyone should keep a level head and tone down the rhetoric a bit.”
[...]
Under a 1988 U.S. currency law, the main purpose of the designation is to force negotiations with the offending country to eliminate any unfair advantage. If no solution can be found, the president can impose penalties.
So for now it looks like whatever additional steps the US would take, it would take them alone.
And a few comments from Brookings article on what the US might do:
The critical question is whether Trump is able to wage a currency war or not. The independent U.S. Federal Reserve has so far held its ground. Although it cut interest rates recently, weakening the U.S. dollar, Fed Chair Jerome Powell was crystal clear that this was a one-off and was not part of a new cycle of rate cuts.
Trump could use the Treasury’s Exchange Stabilization Fund—the fund former President Bill Clinton used to bail out Mexico in the 1990s—to start selling U.S. dollars. But with about only US$100 billion in the kitty, and dollar holdings of just US$23 billion, it is unlikely to be large enough to achieve any sustained depreciation of the U.S. dollar.
The responsible policy players in the United States will try to slow President Trump down. But for how long? And if President Trump cannot weaponize the U.S. dollar, will he simply go back to raising tariffs, quotas, and sanctions still further? One thing is for sure, U.S.–China tensions are getting worse before they get better.
So more of the same as in (escalating) the trade war, basically.
