Tuesday 20 August 2019

Trump's Chinese currency move poses Irish risks

US President Donald Trump
US President Donald Trump

David Chance

When US President Donald Trump named China a currency manipulator on Monday, he did so in defiance of the facts, as Beijing had been working to keep a floor under its currency, not to devalue it.

The president also implicitly walked away from pledges made by his top economic advisers on currencies over the past few weeks, and there is a real risk he will do so again. In a way, that will hit home here, potentially at a time when the economy is knocked by a shock from a no-deal Brexit.

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Part of the rationale for naming China a currency manipulator comes from the US Treasury's twice-yearly review, in which it also named Ireland as having met two of three criteria: a material current account surplus and a significant bilateral trade surplus with the United States.

Germany, frequently the target of Mr Trump's ire over its trade surplus with the US, and Italy also met two of the three tests. With Mr Trump already gunning for the European Central Bank (ECB) as it readies a rate cut next month, as well as pressing for tariffs on German cars, a trade war with Brussels looks to be shaping up.

In the past month, he has pressed the Federal Reserve to "match" the ECB's easy-money policies, saying currencies, including the euro, "are devalued against the dollar, putting the US at a big disadvantage".

Given he already has a report from the US Department of Commerce that suggests imposing tariffs on car imports as they damage America's economic security, it is not hard to see him pushing the button on autos, as trade talks between the EU and US that allowed a temporary truce have not yielded any progress.

Any US tariffs on cars would automatically trigger a response from the EU, as we have seen already from steel and aluminium duties, and from a trade dispute between Boeing and Airbus over subsidies.

While the process using the Treasury monitoring of currencies is slow and cumbersome, in the case of the China announcement on Monday, Washington will now approach the International Monetary Fund (IMF) for an evaluation. It is also looking at ways to act unilaterally and accelerate action.

In July, the US Department of Commerce proposed a new rule that would allow it to impose tariffs on imports from countries that were named as currency manipulators. That would allow Washington to act unilaterally. In the case of naming China this week, it was the fact that Beijing stopped propping up the yuan that caused its decline.

It is worth noting as well that just a few weeks ago, the IMF said the Chinese currency's value was in line with its economy.

While it's true that the dollar has risen in recent years, having gained by 25pc between July 2011 and July 2019 against currencies of its main trading partners, much of that over-valuation was due to Washington's expansionary policies, which have been driven by Mr Trump, according to the same IMF study that looked at the yuan.

Of course, it does not appear that Mr Trump need apply logic to his actions.

He has repeatedly said that China is paying the costs of his tariff wars when it is clear that US consumers are in fact paying, according to many studies, including one by the New York Federal Reserve. Mr Trump's argument on currencies also appears to fly in the face of facts.

That is according to economist Michael Klein and former IMF chief economist Maurice Obstfeld, who noted that the rise in the value of the dollar coincided with a recovery in the number of manufacturing jobs, whereas a decline in the value of the dollar from 2001-09 coincided with the destruction of factory jobs.

When it comes to tariffs on German cars, do not, for example, expect Mr Trump to be influenced by the fact that BMW's largest plant is located in South Carolina.

This exported 70pc of the 400,000-plus autos it made, thus bolstering US exports and providing more than 20,000 high-end manufacturing jobs.

Given the rising trade tensions, there is now a significant risk that the current trade war between the US and China represents the start of a wider backlash to globalisation, which ultimately leads to the disintegration of the liberal rules-based system that has governed the cross-border flow of goods, capital and labour over the past 70 years, says Neil Shearing, chief economist at London-based consultancy Capital Economics.

That would spell bad news for Ireland, where globalisation has driven the rapid recovery from the financial crisis, and where tax revenues from global companies pay for a large chunk of the health, education and other services we all benefit from.

For all the love that was shown to Ireland on president Trump's trip to Doonbeg, it would be unwise to bank on a 'get out of tariffs free card' when push comes to shove on cars and currencies.

Irish Independent

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