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Sticks and stones

16 December 2020 By John Foley

Name-calling doesn’t hurt. When the name is “currency manipulator” it may actually help. The U.S. Treasury on Wednesday slapped that epithet on Switzerland and Vietnam, accusing the two countries of trying to manage their exchange rates to get an unfair advantage against the dollar. President-elect Joe Biden could overturn this mostly symbolic move after he takes office in just over a month. Or he can see it for what it is: a gift from the outgoing Donald Trump administration.

By the Treasury’s own standards, it takes three things to earn the label of currency manipulator. The calculation is based on a country’s trade surplus with the United States, its current account surplus and track record of buying foreign currency. Switzerland and Vietnam fit the bill. In the second quarter of 2020, they were the only two U.S. trade partners that exceeded the Treasury’s thresholds by more than 100%, according to the Council on Foreign Relations. So on that score, Treasury Secretary Steven Mnuchin is right.

The effect of saying so a few weeks before a new government takes office on Jan. 20 is less clear. Labeling a country a manipulator doesn’t automatically lead to any punitive measures, though it can open the way to tariffs and sanctions. Moreover, while Switzerland clearly is in the red zone, there’s little chance of it changing course. Far from weakening, the Swiss franc is already the strongest-performing G10 currency in 2020. The official interest rate in the mountainous confederation is already minus 0.75%, giving the central bank little scope to ease further.

Biden and Janet Yellen, his choice of Treasury secretary, can start anew when their moment comes. But why would they? Dissatisfaction with the international trade system is something many Democrats and Republicans have in common. Biden economic advisers such as Cecilia Rouse, Jared Bernstein and Heather Boushey have all at various times expressed concern about globalization’s losers, though they have stopped short of the protectionism for which Trump’s administration is known.

Seen that way, Mnuchin’s parting shot gives Biden and Yellen a way to be firm, yet collaborative. There are many ways the new administration can tackle currency imbalances, from closer collaboration with the G7 and G20 to refraining from Trumpian rhetoric about preferring a weaker dollar. Lurching further into a trade war would be unwise, but there’s no harm in showing voters at home the new regime is serious about making trade work for everyone.

 

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