The Trump administration has proposed punitive duties on countries that artificially lower their currencies — a sweeping trade policy tool that could be used against US allies as well as adversaries like China.
On Thursday evening, the US Department of Commerce issued a notice of “proposed rulemaking” that would allow the government to slap penalties on countries that “act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports”.
Previous US administrations have been wary of mixing trade and currencies but political pressure from Congress to include foreign exchange as a factor in trade discussions has been growing.
“Foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses,” said Wilbur Ross, the US commerce secretary. “This proposed rulemaking is a step toward implementing President Trump’s campaign promise to address unfair currency practices by our trading partners.”
Over the years US lawmakers have accused China, Japan, South Korea, Thailand and Vietnam of artificially lowering their currencies — but broad new rules could entangle other countries, including in Europe.
One concern with such provisions has always been that if applied with reciprocity, currency provisions could constrain the Federal Reserve, or undermine its independence. Another is that it could invite legal challenges at the World Trade Organization. Yet another is that there is no agreed upon method to measuring undervaluations.
In any case, some analysts say such a US step could be hugely destabilising to the world economic order at a time when it is already under strain. “Were this to happen, it would be a highly significant and corrosive development and a major black eye for the US and the international monetary system,” said Mark Sobel, a former senior US Treasury official.
The move follows a pattern in which Mr Trump has sought to inject measures to prevent currency devaluations into trade deals. The agreement struck last year with Canada and Mexico to revamp Nafta included a currency provision, while the US and China were considering currency measures during their faltering negotiations to end their trade dispute.
The timing of the announcement seemed designed to send a warning to China that the US would not tolerate any moves by Beijing to offset the impact of escalating tariffs on its imports by artificially lowering the value of the renminbi. However, it could also raise eyebrows in Japan ahead of Mr Trump’s visit to Tokyo over the weekend, and in South Korea, where the US president is also due to go in late June.
Reacting to the US proposal, Japanese finance minister Taro Aso said: “At least in the finance ministry, nobody is too worried about this just yet.”
The crucial question for Japan would be whether the US counted monetary easing — which often has the side effect of weakening the currency — as intervention. Japan has not actively intervened in the yen for some years, so it should avoid any US tariffs, but its ultra-low interest rates have led to depreciation against the dollar.
For China, the Treasury department conducts an annual review of its management of the renminbi but has so far not formally declared it to be a currency manipulator.
China’s central bank sets a daily “reference rate” against the dollar for onshore trading, against which the renminbi is only allowed to rise or fall two per cent. While the currency has depreciated eight per cent since June, offsetting most of the impact of tariffs imposed on Chinese imports last year by Mr Trump, the People’s Bank of China has not let the renminbi slide through seven to the dollar since it first tested that level in December 2016.
The imposition by the US of punitive trade measures based on currency policy would be remarkable because countervailing duties are normally used to combat unfair subsidies by America’s trading partners.
Industries that have used those trade remedies in the past, and criticised countries for lowering their currency artificially, welcomed the US move.
“Today’s announcement by Secretary Ross is a significant step by the Trump Administration to help triage the massive damage that undervalued currency is causing to our nation’s manufacturing sector, especially the steel industry,” the American Iron and Steel Institute said in a statement.
With additional reporting by Robin Harding in Tokyo and Tom Mitchell in Beijing