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Mnuchin’s Mission

Summary:
CAMBRIDGE – US Treasury Secretary Steven Mnuchin is hemmed in on all sides. Domestically, he’s trapped between the promises he has made (such as the “Mnuchin rule” that taxes wouldn’t be cut for the rich), the actions of President Donald Trump (whose tax plan includes cuts for the rich), and simple arithmetic (which makes the administration’s conflicting pledges impossible to fulfill). But even on the international stage, where US treasury secretaries typically enjoy more latitude and esteem, Mnuchin is likely to have a hard time. After all, the Trump administration has made it clear that it does not intend to fulfill the global leadership commitments that Mnuchin’s predecessors have overseen. Given Trump’s belief that international negotiations are just a forum for making unilateral demands, how could Mnuchin – who, like his boss, lacks government experience – persuade other countries that adherence to common rules and norms, such as open trade, is in everyone’s interest? Trump’s entire administration is surely expected to adhere to his “America first” approach. As a senior Treasury official recently declared, Mnuchin will be “pushing hard” to ensure that the G20 plays “a helpful role in advancing US interests.

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CAMBRIDGE – US Treasury Secretary Steven Mnuchin is hemmed in on all sides. Domestically, he’s trapped between the promises he has made (such as the “Mnuchin rule” that taxes wouldn’t be cut for the rich), the actions of President Donald Trump (whose tax plan includes cuts for the rich), and simple arithmetic (which makes the administration’s conflicting pledges impossible to fulfill). But even on the international stage, where US treasury secretaries typically enjoy more latitude and esteem, Mnuchin is likely to have a hard time.

After all, the Trump administration has made it clear that it does not intend to fulfill the global leadership commitments that Mnuchin’s predecessors have overseen. Given Trump’s belief that international negotiations are just a forum for making unilateral demands, how could Mnuchin – who, like his boss, lacks government experience – persuade other countries that adherence to common rules and norms, such as open trade, is in everyone’s interest?

Trump’s entire administration is surely expected to adhere to his “America first” approach. As a senior Treasury official recently declared, Mnuchin will be “pushing hard” to ensure that the G20 plays “a helpful role in advancing US interests.”

Fortunately, Mnuchin has so far avoided fulfilling one of Trump’s irrational promises: to label China a currency manipulator on his first day in office. The next opportunity to take that step comes in April, when the biannual Treasury report to Congress is due. Mnuchin should let it pass.

Mnuchin has requested from the International Monetary Fund a “frank and candid analysis” of member countries’ exchange-rate policies, to determine whether China is deliberately keeping its currency undervalued. That’s a good thing; such surveillance is the IMF’s responsibility. But one hopes that Mnuchin recognizes what the answer will be.

China no longer qualifies as a currency manipulator under any of the three internationally accepted criteria: exchange rate, trade balance, or foreign-exchange reserves. The renminbi was undervalued in 2004. But it appreciated 37% in the subsequent decade. After China’s trade surplus peaked at 9% of GDP in 2007, it adjusted to the receding price competitiveness: it has been less than half that level each year since 2010.

In 2014, as the Chinese economy slowed relative to the US, capital flows reversed, sending China’s overall balance of payments into deficit. Reserves peaked in July of that year, and have been falling ever since.

Far from devaluing the renminbi, the People’s Bank of China has spent $1 trillion of its reserves over the last three years trying to support it (by far the largest such intervention in history). The Chinese authorities have reinforced this effort by tightening controls on capital outflows. Thanks to these measures, the renminbi remains one of the world’s more appreciated currencies.

None of this information is new. It is true that it took a while for most American commentators and politicians to notice the sea change in China’s foreign-exchange market. But, three years after it began, most...

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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