Currency games

By naming India as one among six countries whose currencies need to be ‘watched’, the US has sent out a disturbing signal that it will do what it takes to curb its $800 billion-plus trade deficit with the entire world, of which China alone accounts for $375 billion. The US’s sabre-rattling began with an imposition of 25 per cent tariff on China’s steel exports and 10 per cent on its aluminum exports, prompting China to slap retaliatory tariffs on US food and beverages. The latest move underscores that the Trump administration is on a mission to carve out a world trade order to its liking. Besides China, whom US president Donald Trump named a ‘currency manipulator’ in his election campaign, the other countries in this list are Japan, Germany, Korea and Switzerland. The US has used three criteria in drawing up its list of suspect nations: those which have a trade surplus of over $20 billion with the US; indulge in accumulation of dollar-denominated foreign reserves; and have a trade surplus with the rest of the world. India only ticks the first of the three boxes. The rupee has been on the rise in 2017, while its trade deficit as a whole has risen in 2017-18 to about $150 billion. US pressure is unlikely to stop here. It is likely to extend to India’s intellectual property rights, especially with respect to pharma. India should play its cards carefully, by exploring, for instance, markets in China created by the hike in China’s tariffs on US food products such as corn, soyabean and sugar. In these uncertain times, India should also focus on domestic demand as a growth driver and invigorate its Make in India programme. With its exports at 20 per cent of GDP, it is better placed to adjust to trade shocks than overtly export-driven South-East Asian economies, such as Malaysia and Thailand.

The US is also barking up the wrong tree by inveighing against ‘currency manipulators’. The greenback depreciated by about 10 per cent in 2017 against a basket of six currencies, while the renminbi recorded its sharpest appreciation in nine years. The rise of the renminbi has occurred despite a sharp increase in China’s holdings in US treasuries in 2017, perhaps an indication that the exchange rate movements are linked more to fundamentals than financial flows. The US’ inability to bridge its trade deficit points to a productivity crisis, rather than mere currency games. Despite being awash with cheap money, it appears that finance excelled at the expense of the real economy, post 2008. Meanwhile, China has virtually exited the low-wage arbitrage game, while its own consumption demand has improved.

The US needs to look within, rather than look for scapegoats. Above all, the Trump administration poses a serious threat to multilateral rules-based trading, or whatever remains of it. Upholding the WTO system has become more important than ever.