by Bill O’Grady
In February, President Obama signed the Trade Facilitation and Trade Enforcement Act, a broad refresh of U.S. trade laws. Title VII of this law concerns exchange rate and economic policies. The earlier law, passed in 1988, required the Treasury Department to determine if a nation was “manipulating” its exchange rate. If a country was found to be doing so, the Treasury could engage in consultations to change the policies of the manipulator. In practice, the Treasury found few nations in violation of the earlier law. China was tagged with this designation five times from 1992 to 1995, Taiwan twice, in 1988 and 1992, and South Korea in 1988. In reality, being designated a manipulator didn’t trigger significant penalties.
In this report, we will discuss the history of exchange rate issues in trade, the new legislation and its potential impact on U.S. trading partners. We will review the reserve currency role and explain why this role almost precludes any effective trade policy designed to punish foreign trade practices. We will reflect on the new law in light of the current political situation in the U.S. and, as always, conclude with the impact on financial and commodity markets.