Washington Insider -- Friday

Anti-US Currency War Questioned

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Lighthizer Sounds Consistent Themes in Two Days of Hill Testimony

U.S. Trade Representative Robert Lighthizer spent two days this week testifying on trade issues – before the Senate Finance Committee and the House Ways & Means Committee.

On U.S.-China trade prospects, he labeled it a “big if” on whether a trade deal can be struck. He and Treasury Secretary Steve Mnuchin will meet with Vice Premium Liu He in Osaka, Japan to lay the groundwork for meeting between President Donald Trump and Chinese President Xi Jinping.

Lighthizer will also talk with Liu yet this week, he noted. "When actual negotiations begin again, I cannot say at this point, but we are talking, we are going to meet," Lighthizer observed.

As for Japan, Lighthizer acknowledged to both chambers that U.S. agriculture is going to be “treated worse than our competitors” due to Japan’s trade deal with the European Union (EU) and the successor deal to the Trans-Pacific Partnership (TPP).

“We understand the nature of this problem and our farmers are going to lose that market,” he stated. He reiterated a hope of striking an ag-related deal with Japan in the “weeks and months ahead.”

On the U.S.-Mexico-Canada Agreement (USMCA), Lighthizer warned lawmakers it would be a “catastrophe” not to approve the deal. "If we are in a position where we literally cannot pass this agreement, what does that say about our resolve to have a fair-trading system?" he observed, noting China and others will be watching the issue closely.

As for new bilateral trade deals, the issue surfaced in particular on the House side. Lighthizer explained his basic views on such efforts. Asked about the potential for one with Switzerland or others, Lighthizer said,

“When I am asked about this, I always say to myself, ‘Tell me what more we are going to sell you, right?’ I want to know why this is going to make somebody, somewhere in America … a little bit richer. If it does not do that, it is probably not worth my time,” Lighthizer concluded.

President Donald Trump accelerated expectations for positive results of the now-scheduled meeting with Chinese President Xi Jinping at the G20 summit next week in Osaka, Japan.

Trump, who revealed he had a “long talk” with Xi on the phone Tuesday morning, said “China very much wants to discuss the future and so do we.”

Trump predicted a “very good chance” of working out a trade agreement and that some lower-level discussions would begin Wednesday. “I think China wants to make a deal. They do not like the tariffs. A lot of companies are leaving China in order to avoid the tariffs,” Trump said to reporters.

Mixed Tone Out Of China Ahead Of Trade Talks

While welcoming talks between the U.S. and China, statements and newspaper editorials from the country are making clear that from their perspective, coming discussions on trade between the U.S. and China need to be approached in a certain way.

"The heads of the two trade teams will communicate, according to instructions passed down from the two presidents," Gao Feng, Chinese Commerce Ministry spokesman, told reporters. "We hope (the United States) will create the necessary conditions and atmosphere for solving problems through dialogue as equals."

He stated that there are three keys to the coming talks – the removal of additional tariffs, trade purchases and a balanced text for the deal. Gao labeled those as “matters of principle” that cannot be compromised. "China's principles and basic stance on Sino-U.S. economic and trade consultations have always been clear and consistent, and China's core concerns must be properly resolved,” he stated.

The China Daily newspaper stated in an editorial it appeared both sides were ready for “serious dialogue” and that one meeting was not going to result in a resolution, noting that "it would be expecting too much to anticipate one single meeting will wrap everything up. The two parties' expectations are too divergent to allow that," the paper said. "More likely than not, the one-on-one meeting will end up being the start of a new phase in the negotiations with the two leaders personally setting out their country's respective bottom lines."

The Global Times struck a more contentious tone, saying the country can “never be daunted.”

Washington Insider: Anti-US Currency War Questioned

The Federal Reserve meeting this week has come and gone and it says that it is thinking about the need for lower interest rates, but no change was announced—yet. In the meantime, President Trump complained to the press that the U.S. was the target of a “currency war.”

Bloomberg says, “maybe not.”

The report notes that it is usually not hard to tell when a war has started when nation’s move soldiers, tanks, and planes. “Currency wars are tougher to call, partly because there isn’t even a clear definition of what they are.”

Bloomberg says that should be kept in mind when evaluating President Trump’s accusations against central banks in Europe and Asia. He tweeted June 18 that “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”

The President is right on two scores, Bloomberg says. The euro really did decline against the dollar, to $1.12 from $1.16 a year ago, after Draghi, the outgoing president of the European Central Bank, said “additional stimulus will be required if the economic outlook for the 19-country euro zone doesn’t improve.” Trump is also correct that a cheaper currency would likely boost the region’s economy by making exports from the euro zone cheaper abroad and by making imports from the U.S. and elsewhere more expensive.

But Bloomberg disagrees with the president and notes that “many economists also disagree with Trump that Draghi is doing something wrong.”

It would be legitimate for the ECB to cut interest rates, they argue, to stimulate domestic economic growth by lowering borrowing costs for consumers and businesses. Of course, cutting rates would likely reduce the value of the euro, which adds to the stimulus, but that’s a side effect, not the goal. “We don’t target the exchange rate,” Draghi said during a June 18 panel discussion in Sintra, Portugal.

Let’s say the depreciation of the euro managed to worsen the U.S. trade deficit enough to slow down the American economy. The Federal Reserve could respond by cutting interest rates to rev growth. That would incidentally lower the value of the dollar, returning it to its previous exchange rate with the euro. But as in the case of the euro, a weaker greenback would be a side effect of the lower rates, not a primary goal.

It might look like a zero-sum stalemate when two trading partners both cut interest rates, leaving the exchange rate where it started. But it’s not. It’s an overall loosening of monetary policy, which is good for growth in both countries, says Brad Setser, a senior fellow at the Council on Foreign Relations. “In principle,” he says, “that’s just a coordinated easing that increases the level of demand.”

Trump’s argument that China is manipulating its currency is even weaker than his case against Europe, Bloomberg says. Far from pushing down the value of the yuan, the People’s Bank of China has been countering market forces to slow its decline. China has kept the benchmark one-year lending rate at 4.35%, where it’s been since October 2015, in spite of economic softness that might seem to justify a cut. Also, China’s holdings of foreign reserves haven’t risen appreciably, as they would if China were trying to drive down the yuan by selling it and buying other currencies. “The available evidence suggests that China is trying to avoid a currency war,” Setser says.

Chinese leaders don’t want a weaker currency, even if it gives a short-run economic boost, says Marc Chandler, chief market strategist at Bannockburn Global Forex LLC in New York. The country’s long-run objectives are “to move up the value-added chain” and encourage the Chinese “to work smarter, not harder,” Chandler wrote in a June 18 note to clients. Competing on price through a cheap yuan would keep China stuck in its low-tech past.

How would anyone know if a country really were playing unfair by depreciating its currency? One telltale sign is the central bank buying lots of foreign currency to reduce its own currency’s value, even though the country has a big surplus in trade and investment income with the rest of the world. China was guilty of that behavior up until early 2014. Singapore, South Korea, and Thailand have also intervened at various times in recent years to suppress their currencies’ value.

Today one of the chief currency offenders is Taiwan, Setser wrote in a June 18 research note. The Taiwanese central bank says it had $464 billion in foreign exchange at the end of May.

That’s more than the holdings of bigger nations such as Brazil, Germany, and India. (According to a description on the central bank’s website, the value of the Taiwan dollar is determined by forces of supply and demand, though “when the market is disrupted by seasonal or irregular factors, the Bank will step in.”)

So, even if the evidence is thin, U.S. officials have often charged trading partners with “unfair” policies. In addition, the administration’s reliance on escalating tariffs in its “get tough” trade policy negotiations has increasingly come in for criticism by groups on the front lines of such policies. These are high stakes issues for ag producers and should be watched closely as the trade war continues, Washington Insider believes.

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