• Bloomberg, Reuters


Washington’s abrupt declaration Monday that China is no longer a currency cheat — two days before the signing of a trade deal with Beijing — shows how U.S. President Donald Trump has turned a routine technical report on foreign exchange into a political cudgel.

“It’s absolutely being used as a bargaining tool,” said John Doyle, a foreign currency strategist at Tempus Inc. in Washington. “We will look at that report now and wonder: Who are they going to flip on next if its politically convenient to get a deal done?”

The U.S. Treasury Department’s semiannual report has long offered markets crucial signals about U.S. policy toward countries it deems to be manipulating their currencies. Using the report for other means — such as leverage to finalize a trade deal — risks undermining the weight of the designation if markets start to take it less seriously.

Top officials of the world’s two largest economies are due to sign a preliminary trade agreement Wednesday to ease their 18-month-old tariff war.

Under the agreement, China has pledged to buy nearly an additional $80 billion of manufactured goods from the United States over the next two years, plus just over $50 billion more in energy supplies, a source briefed on the agreement said Monday.

Beijing will also boost purchases of U.S. services by about $35 billion over the same two-year period, the source said, aiding a sector that enjoys a rare trade surplus with China.

The “phase one” agreement calls for Chinese purchases of U.S. agricultural goods to increase by some $32 billion over two years, or roughly $16 billion a year, the source said.

When combined with the $24 billion U.S. agricultural export baseline in 2017, the total gets close to the $40 billion annual goal touted by Trump.

The widely expected decision to drop China from the currency manipulator list came in a long-delayed semiannual currency report, reversing an unexpected move by Treasury Secretary Steven Mnuchin last August at the height of U.S.-China trade tensions.

In the first five reports released by Mnuchin, he refrained from labeling China a currency manipulator, despite increasing pressure from the White House. Mnuchin told the White House multiple times that there was no justification for such a ruling, but in August, Trump overrode that decision after the yuan dropped dramatically in response to U.S. trade tariffs, according to sources.

Trump was even involved in drafting the press release. He telephoned Mnuchin multiple times to discuss how the message would be transmitted, directing him to refer to China as a “Currency Manipulator,” using capital letters, according to a person familiar with the matter. It was the first time the U.S. had labeled another country a currency manipulator since 1994, when it also took aim at China.

To justify the decision in August, Mnuchin used a 1988 trade law with a looser definition of manipulation, rather than the more current 2015 law that requires the twice-a-year report to Congress. Under the more recent law, China does not meet the three criteria to be designated a currency cheat.

“The Trump administration has adopted a different definition of manipulation than the standard definition for China,” said Brad Setser, who worked at Treasury during President Barack Obama’s administration and is now at the Council on Foreign Relations. “It isn’t seeking that China step back from guiding the foreign exchange market; rather, the administration wants China to resist depreciation pressure.”

The International Monetary Fund declined to endorse Trump’s view on the yuan, saying last year that the currency was “fairly valued.”

But it’s not the first time Treasury has been accused of playing politics with the report. During the financial crisis that began in 2007, Treasury secretaries under both George W. Bush and Obama stopped short of saying China cheated in currency markets. Instead, the U.S. warned Beijing about its “severely unbalanced” currency.

In the latest currency report released Monday, Treasury said that no major trade partner is manipulating its currency, and named 10 countries on its monitoring list, including China.

“Introducing such a blatant political act with the August designation — one that flew in the face of Treasury’s own criteria — lowers the integrity of the report around the world,” said Mark Sobel, who oversaw the Treasury’s report from 2000 to 2015 as a civil servant. “Others will use this precedent in the future to dismiss the Treasury report, even when Treasury has merit.”

Smaller countries on the brink of being labeled manipulators — such as Vietnam and Thailand — may feel the impact the most.

In April, when Vietnam learned that it may be designated a currency manipulator — a label that comes with no immediate penalties but can rattle financial markets — Vietnamese officials flew to Washington to present additional data showing the country does not artificially hold down the value of the dong.

Vietnam was spared in Treasury’s currency report, in which the U.S. instead said it’s closely monitoring the dong.

Now, Thailand appears to be at risk of being designated in the April report that will review data from the second half of 2019. Its trade surplus in November reached $20.5 billion, putting it in violation of a $20 billion threshold that Treasury has set for bilateral trade goods deficits. It also has a higher current account surplus than Treasury allows. U.S. and Thai officials are in “close dialogue” over the shift, according to the Bank of Thailand’s governor.

Chinese Vice Premier Liu He arrived in Washington on Monday for a White House ceremony to sign the trade deal with Trump. People familiar with the negotiations said that although the manipulator designation had no real consequences for Beijing, its removal was an important symbol of goodwill for Chinese officials.

U.S. Trade Representative Robert Lighthizer said Monday the translation of the U.S.-China trade agreement was almost completed and the text of the deal would be made public Wednesday before the signing ceremony.

The Treasury report also cited continued concerns about the currency practices of eight other countries — Germany, Ireland, Italy, Japan, Malaysia, Singapore, South Korea and Vietnam — and added a ninth, Switzerland, to its list.

It raised particular concerns about Germany, the world’s fourth-largest economy, which it said continued to have the world’s largest current account surplus and was slipping into recession. It said the German government had a responsibility to undertake tax cuts and boost domestic investment.

The Treasury report said the continued strength of the dollar was “concerning,” given the International Monetary Fund’s judgment that the U.S. currency was overvalued on a real effective basis.

It said the real dollar remains about 8 percent above its 20-year average, noting that sustained dollar strength would likely exacerbate persistent trade and current account imbalances for the United States.

U.S. Senate Democratic leader Chuck Schumer, a fierce critic of China’s currency and trade practices, blasted the Trump administration for its decision to “back down” from labeling China a currency manipulator.

“China is a currency manipulator — that is a fact,” Schumer said in a statement. “Unfortunately, President Trump would rather cave to President Xi (Jinping) than stay tough on China.”

The yuan reached five-month highs earlier Monday ahead of the expected signing of the trade deal.

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