The U.S. Treasury Department has a warning to the developing world: the export-your-way-from-prosperity template is not compatible. This development model that was once considered a way to get cheap goods for US purposes — is now in doubt. Despite the passage to some economies last week, the Asian message needs to be louder and clearer. The United States has stopped stamping out Taiwan, Vietnam and Switzerland as currency manipulators in its semi-annual assessment of foreign exchange policies by trading partners. In normal times, they will be branded with the Scarlet M for keeping their currencies under control. But officials have not been able to determine whether their methods are for commercial purposes, or to reduce markets and reduce recession. Pandemic twisted capital flows around the world and many countries have had to respond. This time, the three fled with a wrap on their knees. The soft approach is a change from the Trump administration, which has tagged Hanoi and Bernర్ as manipulators and preached to others such as India, Thailand, Singapore and South Korea.
In the late 1980s, the Treasury report mainly targeted Japan. Over time, the focus shifted to China, whose officials play a major role in managing the country’s currency. However, the boldness of last week’s publication reveals a global outlook beyond Beijing. Since the 2015 law added the criteria to be measured, the current-account and bilateral trade surpluses have been in crosshairs similar to the implications of foreign exchange transactions. Suffice it to say that Country X sold Y dollars worth of its currency in Z months. Officials are also looking at the current-account surplus, and whether it is at least 2% of gross domestic product (GDP). They will also look into the bilateral trade surplus. If the gap over the 12 month period is at least 20 billion to 20 billion, it is a sign that you are against it. Press three of them and you manipulator. Check both and you will be called to the monitoring list. Thus Pauls like South Korea, India, Germany, Italy, Singapore, Thailand, Malaysia and Japan are a kind of purge. (China is.)
The last two reports include a review of the development history of some of the wrong business partners. They examine how these economies attracted manufacturing from abroad and how they were woven into global supply chains, which began to close over Asia in the 1980s. The latest publication examines Taiwan, while Vietnam is on display in December. These summaries can also explain how Asian economies have grown out of poverty: attracting foreign direct investment (often thanks to low-cost labor, but also through tax breaks), committing to infrastructure and gaining access to larger markets. This has enticed multinational corporations. As the fastest industrializing Asian countries relied on trade, they hated high exchange rates. Since the final destination of these items are store shelves or factories in the US, it is easy for officials and politicians to look the other way. In the political climate that pattern has waned.
What price does the US charge to convert currency sinners? It is a little soft. The status quo, if any, does not constitute immediate sanctions. The law requires the Treasury to engage manipulators to address this. Penalties, including exemptions from U.S. government contracts, apply one year later, unless the label is removed. Other agencies may also use it as a cuddle with their own preferences and constituencies. Last year, the U.S. Trade Representative Office examined Vietnam’s need for remedies for cheap dong. Doing nothing this time, the U.S. Treasury encourages behavior that seeks to change that.
Taiwan Central Bank Governor Yang Chin-Long said his large trade surplus with the United States was due to strong demand for semiconductors, more than any unfair benefit from currency interference. “If they want to reduce our trade surplus with them, then we can stop selling them our chips,” he joked, “but they need them!” Yang may be right, but for Taiwan, the strength of US friendship is not testable. Here, the Vietnam experience is instructive. It went from shooting children to changing supply chains from China, to firing from powerful voices in the U.S. industry and government.
Janet Yellen does not advise Vietnam to get out of the jungle as it is blocked. The gray zone is important. If you think that everything in the US is about China, the last two reports of the US Treasury indicate otherwise. This goes beyond the daily yuan-trading guidelines. A framework for economic progress is under the microscope. The test will be after the covid interruptions start to decrease.
Daniel Moss is a Bloomberg opinion columnist covering Asian economies.