It’s the potential Trump trade war Asia didn’t see coming: a weaker dollar.
A “too strong” greenback is “killing us,” then-President-elect Donald Trump told the Wall Street Journal, uttering perhaps the only words on the planet that might get China’s President Xi Jinping and Prime Minister Shinzo Abe on the phone together. What Asia’s two biggest economies had going for them is sliding currencies making exports more competitive. Is 2017 the year Asia finally beats its export-led-growth addiction?
First, let’s not get ahead of ourselves in renaming the dollar the “peso.” As Federal Reserve Chair Janet Yellen said Wednesday, policy makers expect to hike rates “a few times a year” going forward. Trump’s tax-cut and spending plans and calls for repatriating corporate profits held overseas will almost certainly accelerate corresponding jumps in bond yields. Interest-rate differentials will complicate any Trump move to devalue the reserve currency.
But there are three positives to Washington capping the dollar’s gains. One, any successful strategy by Trump, who got sworn in Friday, to stimulate demand in the biggest economy is plus globally. Two, it would draw less investment away from Asia (a dollar rally helped cause Asia’s capital flight in 1997). Three, it could catalyze Asia to drop a counterproductive weak-exchange-rate fetish that stymies economic development.
This last point deserves far more scrutiny in the year Asia commemorates the 20th anniversary of its financial reckoning. While aggressive Fed rate hikes and a rising dollar took the wind out of Asia’s sails, it was frail, over-indebted and non-transparent financial systems that left Indonesia, South Korea and Thailand so exposed. Policy makers addressed most of those vulnerabilities, progress that helped Asia avoid the worst from America’s crisis in 2008 and the Fed “taper tantrum” of 2013. Just as important, though, is the unfinished business from that period: a self-defeating addiction to exports.
Look no further than Japan. Since 2012, Tokyo talked boldly about economic structuring and financial big bangs. In reality, though, Abe mostly just nudged the Bank of Japan to devalue the yen. In Beijing, Xi laid out an ambitious reform agenda, only to revert to expanding credit and, now, lowering the yuan. A similar policy tunnel vision from Seoul to Singapore to Hanoi blinds leaders from the need to increase domestic innovation and build new-economy services sectors to replace old-economy manufacturing industries.
A sharply weaker dollar would be quite destabilizing at first, with feedback effects whipsawing bonds, stocks and economic forecasts everywhere. But if it’s the shove Asian policy makers need to break a cycle they pledged to 20 years ago, the end may justify the means. The result could be startup booms that create jobs and wealth from the ground up, not just giant national champions from the top down.
That said, Trump must proceed cautiously. Gutting the lynchpin of the global system is in no one’s best interest, least of all a U.S. Congress that just greenlighted another $10 trillion in new borrowing over the next decade. Less confidence in the dollar could cost the U.S. more in higher borrowing costs than it gains in export advantage. So could Trump’s threatened 45 percent tariffs on Chinese goods. And then there’s the ever-present risk of Trump’s Twitter feed roiling foreign-exchange markets at all hours.
Of course, Trump just may be stating aloud what both the Obama and Bush administrations thought privately. In January 2013, when Jack Lew became Barack Obama’s second Treasury secretary, he told the same fib Timothy Geithner and Henry Paulson did before him: we love a strong dollar. In a world of weak growth, tepid demand and ultra low interest rates, no one is really happy to see exchange rates surge. As he tries to make good on pledges to bring American jobs home, Trump understandably sees a softer dollar as an asset.
A potential source of hypocrisy, too, after Trump accused China’s yuan of “raping our country.” In Davos this week, Xi assumed the mantle of global economic stakeholder, to Trump’s evolving role as shareholder. There’s also hypocrisy in Xi’s juxtaposition attempt, one he’d be foolish to take too far. It’s vital for Xi to get his domestic house in order, not just talk about it.
As Trump threatens to withdraw from the global system — the United Nations, NATO, Trans-Pacific Partnership — replacing America on the world stage isn’t a Beijing birthright. Xi’s government needs to be a solution to the world’s economic, environmental and human-rights troubles, not a purveyor. Step one is doing more to generate growth that enriches neighbors, not just Communist Party bigwigs in Beijing.
We can debate the pros and cons of Trump slapping the dollar. But if it gets China, Japan and the rest of Asia to stop procrastinating and diversity growth drivers, it’s not all bad.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian issues. www.barronsasia.com
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