America Fires A Warning Shot On Currency Manipulation
It’s a tale about two former warring adversaries, tyres, and the dong. One that, amidst new non-fiction horror on climate change, Covid-19, and Afghanistan, is ignored. It’s a tale, like Shakespeare’s Henry VI: Part Two, loaded with characters and details. It’s an unusual tale, in that its co-authors, Donald Trump and Joe Biden, disagree on writing styles.
But, it’s a true tale and a cautionary one for India and the world.
Here’s the plot summary:
In its first-ever use of the ‘Currency Rule’, the United States of America recently imposed countervailing duties or CVDs on Vietnamese-origin passenger vehicle and light truck tyres, following U.S. Treasury Department and Trade Representative reports that the State Bank of Vietnam depressed the exchange rate of the Vietnamese dong against the U.S. dollar.
In this genre, collaborating with the U.S. Treasury Department and USTR are the Commerce Department and International Trade Commission. With a glance at the International Monetary Fund, they scrutinise foreign central bank behaviour for currency manipulation that, in turn, constitutes an illegal export subsidy.
Chapter 1: The Tale Begins…
...in May 2019, with drama in legal trenches.
President Donald Trump’s Department of Commerce suggested two changes to its regulations to account for currency manipulation in countervailing duty investigations. The first proposal concerned the ‘Specificity Test’ in CVD cases. The WTO Agreement on Subsidies and Countervailing Measures says an alleged subsidy is not illegal unless it is specific to an enterprise or industry.
That Test is needed to differentiate generally available support, like free Covid-19 vaccinations, from free electricity to a textile factory. If a complainant (say, the U.S.) alleges the offending (say Indian governmental) subsidy qualifies as a ‘red light’ (i.e., strictly prohibited) one, then the complainant can invoke the irrebuttable presumption that the subsidy is ‘specific’. That facilitates its chance of winning, but…
The problem was, though export subsidies indisputably are ‘red light’, the WTO's SCM Agreement does not clearly identify currency manipulation as an export subsidy.
Claimants had to classify the subsidy as ‘yellow light’ (i.e., actionable), which meant they had to cite evidence of specificity. Ugh.
After decades of waiting for the WTO to formulate rules about the export subsidies-currency manipulation link, the U.S. Commerce Department proposed that, under its Specificity Test, entities engaged primarily in the traded goods sector – i.e., importation and/or exportation – could be considered a group of enterprises, and thus be ‘specific’. Their activity (trading internationally), rather than their merchandise (an identifiable product) could define them to pass the Test.
The logic was that as exporters, this ‘specific’ group benefits from currency manipulation. Hypothetical case in point: by artificially holding down the exchange rate of the rupee against the dollar, the Reserve Bank of India makes Indian exports cheaper, in U.S. dollar terms to American buyers, while making American exports more expensive, in rupee terms, to Indian buyers.
The second change concerned the ‘Benefit Test’.
That mattered, because to prove a subsidy is illegal (under WTO and U.S. law), a complainant must prove a subsidy recipient ‘benefits’ from the support.
Absent guidance from the SCM Agreement, the Commerce Department said it for sure does from currency manipulation. Commerce also said it would rely, in CVD investigations, on Treasury to evaluate whether an alleged subsidizing country is a currency manipulator – as it has threatened to dub India in 2018 and 2020.
In February 2020, after pouring through scores of comments about its two ideas, the Commerce Department published its two proposals, with some modifications, as a final regulation, with effect from April 2020. The Trump Administration thereby eased standards for American producers to hit foreign exporters with anti-subsidy suits, removing worries about ‘specificity’ or ‘benefit’ technicalities, and expressly identifying currency manipulation as a reason to countervail.
Chapter 2: Manipulated Currency
Donald Trump’s Chapters didn’t follow a conventional linear narrative. Of the two co-authors, he’s the post-modern one: there’s lots of stuff happening contemporaneously.
In January 2020, Trump’s Treasury Department issued a report on currency manipulation. Among the villains the report identified was Vietnam. The Department applied its three-fold definition for ‘currency manipulation’, namely, a country:
Has a significant bilateral trade surplus with the U.S., i.e., at least $20 billion over a 12-month period;
Has a material current account surplus, that is, of at least 2% of GDP over 12 months; and
Engages in persistent, one-sided intervention, i.e., conducts repeatedly net purchases of foreign currency, in at least 6 out of 12 months, which total at least 2% of its GDP over a 12-month period.
Vietnam (in the four quarters through June 2019) met the first, and was close on the second and third, criteria. Its goods trade surplus with America was $47 billion. But, its current account balance narrowed to 1.7% of GDP. It intervened in forex markets frequently to keep a close dong-dollar link, yet its purchases summed to 0.8% of its GDP.
Ah, but the plot thickens…
Commerce said it would follow Treasury’s lead on identifying target currency manipulators, but Trump’s USTR entered the scene as an ally. Close was good enough for the USTR to launch a Section 301 investigation in October 2020.
The USTR’s charge?
The State Bank of Vietnam unfairly devalued the dong against the dollar by approximately 7% to 8.4% (using real effective exchange rates) between 2017 and 2019.
Guilty: “Vietnam’s acts, policies, and practices including excessive foreign exchange market interventions and other related actions, taken in their totality, are unreasonable and burden or restrict U.S. commerce.”
Not so fast. It was time to change co-authors. Joe Biden won Donald Trump’s pen and mused about the next Chapter on the Vietnamese villain.
Chapter 3: Subsidised Tyres
The authorial change didn’t spell the worst of times for Vietnam, but it didn’t herald the best of them, either.
Biden’s Commerce Department picked up the Trumpian narrative.
In August 2020, in a CVD case in which the subject merchandise was passenger vehicle and light truck tyres from Vietnam, the Commerce Department accepted evidence of currency undervaluation, based on a valuation assessment from the Treasury Department. In October, Commerce issued a preliminary affirmative CVD order imposing estimated duties of 6.23% to 10.08% on passenger vehicle and light truck tyres imported from Vietnam because of the undervalued dong.
The final affirmative determination against the Vietnamese PVLT tyres came in May 2021: for the first time in U.S. trade history, the Department of Commerce ruled subject merchandise was unfairly subsidised due to currency undervaluation, namely, the conversion of U.S. dollars into dong at an undervalued exchange rate. The Department of Commerce finalised the subsidisation rate, and thus the CVDs, at 6.23% to 7.89%.
The U.S. International Trade Commission followed with its own first-ever use of the Currency Rule. In June 2021, the ITC rendered a final affirmative CVD injury determination. Vietnamese-PVLT tyres materially injured the U.S. industry producing like products. Remedial duties on the subject merchandise started in July.
Oh, lest this thread of the narrative be forgotten, everyone knew of the USTR’s Section 301 case, meaning the villain had two currency-CVD police cars on its tail: one with Treasury, Commerce, and ITC cops, and the other with USTR cops.
Chapter 4: All’s Well That End’s Well?
Yes, the USTR cops went home.
With the Commerce Department’s imposition of CVDs against Vietnamese tyres, plus the USTR’s citation to the State Bank of Vietnam, mandating monitoring of the SBV’s efforts to modernise and make more transparent its forex operations, and enhance the exchange rate flexibility of the dong, the USTR determined no further Section 301 action was necessary … as long as SBV behaved.
But is it behaving?
Rumour has it Vietnam may be cleverly yet subtly manipulating its currency through forward foreign exchange markets.
Chapter 5: The Tale Continues…
Joe Biden never stopped collecting material about India and around the world, and Donald Trump would do so again if he ever gets the pen back. Whether friend (India, Switzerland), foe (China, Russia), or frenemy (Pakistan, Saudi Arabia), U.S. authorities have and/or will go after exchange rate manipulators. They will offset undervalued currencies as illegal subsidies.
That’s not only because the co-authors agree on vigorously enforcing trade rules and protecting American industry and jobs. It’s also because there’s no new manuscript on free trade agreements in the offing. Congressionally-delegated Presidential trade negotiating authority expired on July 1.
Watch out next for more American trade non-fiction: Biden is trying to figure out how to finish a book his co-author started entitled ‘The Forever Sino-American Trade War’, plus write his own called ‘What a Worker-Friendly Trade Policy Means’.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.