Call it passive-aggressive currency war.
While one of Trump's most sincere desires, both during his campaign, and ideologically from his life prior to politics, has been to publicly declare China a currency manipulator - something he promised he would do on day one of his administration - and crack down on the "undervalued" Yuan (even though over the past 18 months, China has been scrambling to prevent further devaluation of the Yuan in light of over $1 trillion in capital outflows in recent years), lately Trump appears to have gotten second thoughts, and after backing off on his intent to negotiate the "One China" policy, now Trump is looking for a way out of engaging China directly in currency war.
That is the impression we get from reading a WSJ piece, according to which the White House is exploring a "new tactic" to discourage China from devaluing the Yuan to boost exports, without explicitly accusing it of currency manipulation, something the US last did in 1994 under the Clinton administration. Under the plan, US commerce secretary Wilbur Ross would designate the general practice of currency manipulation "as an unfair subsidy when employed by any country, instead of singling out China." Following such a designation, U.S. companies would be in a position to bring antisubsidy actions themselves to the U.S. Commerce Department against China or other countries.
By engaging in such "passive-aggressive" currency warfare, which avoids direct confrontation with Beijing and which may have been conceived during last week's Trump-Xi phone call, the administration would avoid making confrontational claims about whether China is manipulating its currency for trade benefit, the WSJ reports, in the process allowing Xi to save face and avoid having to defend himself domestically in a key year politically for the Chinese president. Trump also avoids looking weak, as eventually exporter complaints can be addressed via conventional channels, resulting in tariffs and other anti-subsidy actions, as has been the case for many years under the Obama administration.
But there would be no apriori statement of currency manipulation intent singling out any one country, namely China.
To be sure, the WSJ also confirms that "the move could be a sign the Trump administration is softening its stance on China. During his presidential campaign, Donald Trump threatened to label China a currency manipulator on the first day of his administration, which he didn’t do. He also threatened to slap 45% tariffs on Chinese goods, an idea he hasn’t raised recently."
A potential complication emerges in that just like Trump's border adjustment proposal, the currency move, if effected, may be a violation of World Trade Organization rules, the same as BAT. Other countries are also sure to take similar measures against U.S. exports and could argue that Federal Reserve policies that weaken the dollar qualify as subsidies. They would be completely right.
It also explains why in a world in which - absent a modest detour here and there - everyone is rushing to devalue their currency. the Obama administration, concerned about such consequences, decided against naming currency practices as a subsidy.
Making things more complicated is that until recently China was actively devaluing the Yuan far more aggressively against all other members of its currency basket, while strengthening relative to the dollar, diluting the American case that China was singling it out in currency warfare, and ironically giving other nations ammo to launch complaints against China.
What appears to have brought on the change in policy is what we - and many others - have been saying for the past three months: China has been manipulating its currency higher, not lower, ever since the dramatic capital outflow out of China started in early 2015.
A string of corporate executives have told the Trump White House that China no longer is pursuing an undervalued currency and has run through $1 trillion in foreign reserves trying to stem the yuan’s persistent decline.
In an interview with the Journal in January, Mr. Trump rejected that claim, saying Chinese leaders talk about supporting their currency “because they don’t want us to get angry.”
In any case, just like most of Trump's other economic "priorities" - at least as stated during his campaign - now currency manipulation is “not on top of agenda of the American business community in China,” said James McGregor, China chairman for APCO Worldwide, a communications and lobbying firm. Last week he visited the White House and other government offices as part of a delegation of U.S. business officials from China.
As for the "new" approach, it is really nothing new compared to how US-China trade relations were under Obama: categorizing currency manipulation as a subsidy would give U.S. companies a new measure to use in case China reverts to a more mercantilist approach. Companies routinely bring antisubsidy suits to the Commerce Department against imports which they argue are being improperly subsidized by foreign governments. If the U.S. firms prevail, Commerce often assesses heavy duties on those imports, which sharply limits imports.
“It’s a great first move,” said Dan DiMicco, former chief executive of steelmaker Nucor Corp., who has been advising the Trump team on trade issues. “It allows companies to use trade laws to consider currency manipulation, which is rampant in the world, especially in China, as a subsidy.”
As the WSJ adds, prominent Democrats, including Senate Minority Leader Chuck Schumer of New York and Ohio’s Sherrod Brown, have long argued for previous administrations to make such a change.
Finally, the WSj also reports that the Trump admin is also looking to "tighten oversight of foreign acquisitions of U.S. firms that have access to important technology", in other words curbs Chinese inbound M&A, which emerged one year ago as one of China's preferred mechanisms of engaging in offshore cash laundering (in addition to buying Vancouver houses of course).
The Committee on Foreign Investment in the U.S., or CFIUS, an interagency committee that reviews foreign acquisitions, would get broader scope to reject deals that threaten national interests, said individuals involved in discussions with the White House.
The White House is also examining the creation of an additional panel to look more broadly at the transfer of U.S. technology overseas, whether by acquisition, license or joint venture, these people said.
Beijing has traditionally counted on American corporations to blunt U.S. government policy offensives on the Chinese economy. But that support may be weakening. According to a survey last month by the American Chamber of Commerce in China, 81% of member companies feel that foreign businesses are less welcome in China.
“The American business community in China welcomes a pushback because China has overreached,” said Mr. McGregor, the APCO official. “But it has to be smart and well thought-out and focus on real issues between the two countries, such as techno-nationalism and the step-by-step closing of market access for foreign companies in China.”
The take home summary: less than month into the job, Trump is realizing that making any real changes in the global economic status quo, aside from public bluster and tweeting about it, will be far more difficult than he thought. And now that Mnuchin is by his side providing "advice", it is safe to say that most if not all of Trump's radical economic promises will soon similarly fade away into the "assive aggressive" horizon.