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What's Behind the "Currency Manipulator" Label?

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What's Behind the For UBS marketing purposes The U.S. Department of Treasury officially labeled China a "currency manipulator" last week. (ddp) House View Weekly What's behind the "Currency Manipulator" label? 12 August 2019, 5:36 pm CEST, written by UBS Editorial Team The US Department of the Treasury officially labeled China a "currency manipulator" last week, following the latest bout of weakness in the yuan that pushed the Chinese currency above 7 per US dollar. The implications of this designation are largely symbolic in three criteria in every Report since the October 2016 Report, nature, in our view, with two important caveats. having a significant bilateral trade surplus with the United States." In our view, China doesn’t seem to come anywhere First, the harsh rhetoric employed by President Trump and near the thresholds for the other two criteria, so last week's the Treasury increases the risk that the US-China trade announcement appears to have been influenced primarily conflict escalates further. Second, the Trump administration by political considerations. has a number of small additional tools it can use to put pressure on China, and is looking to add more substantive The US can initiate actions against countries it has labeled action behind the "currency manipulation" moniker. "currency manipulator" if no progress is observed one year after engaging in discussions with the country. Under the Trade Facilitation and Trade Enforcement Act These actions include prohibiting new financing toward of 2015, a country needs to satisfy three criteria before development projects; prohibiting federal government it can be called a currency manipulator. The Treasury has procurement of goods and services from the country; discretion on the thresholds that apply to each criterion, instructing the IMF to conduct surveillance on exchange- and the latest have been set as follows: a bilateral trade rate policies; and renegotiating trade agreements. While surplus with the US of more than USD 20bn; a current these are all punitive in nature, we don't think they can account surplus of more than 2% of GDP; and persistent inflict palpable pain in the short term. one-sided currency intervention, adding to 2% of GDP over the last six to 12 months. With the announcement, the Treasury appears to have bent its own rules. The Trump administration has also In its latest semiannual Report to Congress, published in been seeking the ability to use countervailing duties on May, the Treasury concluded that "China has met one of the the back of the "currency manipulator" label. Under UBS Investment Insights For UBS marketing purposes US law, countervailing duties can be applied to imports that have been subsidized by a foreign government. Some argue that currency manipulation is the functional equivalent of a subsidy, and that this should also be an "actionable" subsidy under US law. The Commerce Department is attempting to implement this by modifying existing regulations, without the need for legislation. The administration's attempt to allow the use of duties against currency-manipulating countries would add to the justification for tariffs, potentially diminishing the scope for opposition from domestic political opponents and affected business groups. In sum, although the "currency manipulator" label is largely symbolic in nature, its impact should not be dismissed outright: It represents another dangerous maneuver in a tit- for-tat trade conflict that could quickly escalate further. Main contributor: Alejo Czerwonko Read more in , "Currency manipulator label: Symbolic, with some caveats." UBS Investment Insights For UBS marketing purposes Important information As a firm providing wealth management services to clients, UBS Financial Services, Inc is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures UBS provides to you about the products or services offered. For more information, please visit our website at www.ubs.com/workingwithus. ©UBS 2019. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC. There are two sources of UBS research. 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