THE SOUTHERN SHRIMP ALLIANCE, an industry association based in Florida, is angling for tariffs. It has tried repeatedly to have foreign competitors harpooned with duties. Now some new opportunities have surfaced. The Department of Commerce is proposing a rule enabling tariffs on imports from currency manipulators. Crustacean-catchers are keen.
American businesses disgruntled by what they see as distorted exchange rates may soon have more weapons at hand. After weeks of fulmination by President Donald Trump on Twitter about countries that keep their currencies artificially weak to America’s detriment, financial analysts are speculating that the Treasury might use its Exchange Stabilisation Fund (ESF) to weaken the dollar. Elizabeth Warren, a Democratic presidential hopeful, has also called for the dollar to be managed to promote exports, referring to proposals by Fred Bergsten and Joseph Gagnon of the Peterson Institute for International Economics, a think-tank.
The chatter is odd in one respect: other countries’ currency manipulation does not seem to be the reason for the dollar’s strength. Although an IMF report published on July 17th said that the dollar was overvalued by 6-12%, it also said that foreign-exchange intervention had been playing “a much more muted role in recent years”. America’s loose fiscal policy—and the tighter stance of countries like Germany and the Netherlands—are more obvious culprits.
However misdirected the current ire, the multilateral system for restraining currency manipulation is indeed toothless. In 2007 the IMF refrained from declaring China a currency cheat, although it was running a current-account surplus of 10% of GDP and buying around $2bn in dollar-denominated assets each business day. Preparing for a future bout of competitive devaluation might not be a bad idea.
But the proposals floating around Washington would be ripe for abuse. The Commerce Department’s would allow its officials to declare a country a manipulator even if the Treasury had not. Companies seeking an unfair edge over foreign competitors would no doubt lobby hard.
The measures suggested by Mr Bergsten and Mr Gagnon would grant Mr Trump huge financial firepower—dangerous, given his penchant for using whatever weapon is to hand to fight his trade wars. They think the Treasury should be allowed to use the ESF to neutralise currency intervention by other countries with equal and opposite purchases, thus deterring the intervention in the first place. But to be credible it would need hundreds of billions of dollars at its disposal. Its current portfolio is around $95bn, of which $23bn is in dollars.
Moreover, unilateral action might lead other central banks to retaliate. Mark Sobel, a former Treasury official who managed the ESF, worries that a currency conflict might even push the dollar up, if investors scurried for safety into dollar-denominated assets. Stephen Englander of Standard Chartered, a bank, warns American policymakers to “think about how you’re going to feel the morning after”. Intervention means buying unpopular currencies. Mr Bergsten and Mr Gagnon argue that their scheme could make the Treasury money as undervalued currencies rise. But negative yields on European and Japanese debt make losses at least as plausible.
One more reason for caution is the potential for further harming an already-fragile multilateral system. Previous American administrations considered tariffs on imports from countries manipulating their currencies, arguing that an artificially weak exchange rate amounted to an export subsidy. But they held back, understanding that such action would break the World Trade Organisation’s rules. A reversal would invite legal challenge, and perhaps retaliatory tariffs. The bellicose Mr Trump, however, would be unlikely to mind. ■