Tit for Tat Continues – Will It Ever End?

Source: Canada US
Link: Tit for Tat Continues – Will It Ever End?

Originally published by the Journal of Commerce in August 2019

Much has been said recently in the general press about the latest round of tariffs and what did or did not prompt President Trump to decide that August 1st was the right time to impose an additional 10% on the goods from China on the final version of List 4A/B.  Regardless of the reason (s), this additional tariff will take effect on September 1, and companies are once again forced to adapt. Just about every trade lawyer is providing the same list of options for companies to consider – and there really aren’t many and none of them are particularly good. The current situation feels very much like the scene in a boxing movie where the two heavyweight fighters stand in the middle of the ring looking like they are trying to beat the crap out of each other, but whatever blows are landed seem to be without any inkling either is doing real damage to the other, beyond wearing each other out!

What makes the current turn of events interesting is the choice of words on both sides. U.S. negotiators went to Shanghai and met for a relatively brief period of time with their Chinese counterparts. Shortly after their return home, the Trump Administration took language from a press release by the People’s Bank of China (“PBC”), shouted Eureka! and then claimed China admitted to being a currency manipulator.   The relevant press release can be found here: http://www.safe.gov.cn/en/2019/0805/1541.html. The language in question is found at the very end: “The PBC is fully equipped with the experiences and the capacity to support smooth operation of the foreign exchange market, and keep the RMB exchange rate basically stable at an equilibrium and adaptive level.”

Upon reading this, which was obviously a convenient trigger, Treasury Secretary Stephen Mnuchin invoked Section 3004 of the Omnibus Trade and Competitiveness Action of 1988, stating it required him to “‘consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.’ Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator.’ As a result, Secretary Mnuchin now turns to the International Monetary Fund ‘for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.’”

The PBC responded: “’This fluctuation is driven and determined by the market…” [according to Governor Yi.]  ‘Whether it is from the fundamentals of the Chinese economy or from the balance of market supply and demand, the current RMB exchange rate is at an appropriate level. Although the RMB exchange rate has fluctuated due to recent external uncertainties, I am confident that the RMB will continue to be a strong currency,’ Yi said’”. This press story goes on to quote the Chinese central bank as linking the RMB fluctuations to “unilateralism, trade protectionism measures and the increase of tariffs on China.” For the full story, see https://www.cnbc.com/2019/08/05/chinas-central-bank-denies-its-devaluing-countrys-currency-to-counter-tariffs.html

When Federal Reserve Chairman Jerome Powell announced the latest interest rate cut on July 31, 2019, he said:  “We decided today to lower the target for the federal funds rate by ¼ percentage point to a range of 2 percent to 2¼ percent. The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook. It is intended to insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are currently having on the economy, and to promote a faster return of inflation to our symmetric 2 percent objective. All of these objectives will support achievement of our overarching goal: to sustain the expansion, with a strong job market and inflation close to our objective, for the benefit of the American people.” A transcript of the press conference can be found here: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190731.pdf.

If one takes the statements from the two financial authorities and reads them together, they say basically the same thing – we are responding to market conditions!  The general consensus is the move by the U.S. was an ill-guided attempt to try to put more pressure on China. Given the law on which Secretary Mnuchin relies has no enforcement teeth, see 22 USC 5304, a critical question is just how will his attempts be received? The steps undertaken by the Administration so far has been to challenge everyone, friend and foe alike. Given the current economic conditions in China, if all things are equal, does anyone question how the IMF will decide?  This is where skilled negotiators and a disciplined Administration could have made a  real impact. In fact, there was some smart money wagering that labeling China a currency manipulator would be among the first step taken by the new Administration. Does the current action have any steam at this point in time? Does anyone see this ending positively for Mr. Mnuchin’s efforts?