Yellen’s Failure on Currency Manipulation: “What She Said. What She Did.”

In her Senate hearing and in her written responses, Treasury Secretary nominee Janet Yellen took a lot of questions about the dollar. Other than the dollar’s status as international central bank reserve currency of choice, Senators asked for her thoughts on currency manipulation by other countries. It made sense they would. The outgoing Treasury Secretary, Stephen Mnuchin, had just called Switzerland and Vietnam currency manipulators. New President Joe Biden said he would not tolerate countries that made their currencies weaker to give themselves a competitive edge.

Here is Biden’s Made in America pledge:

“Take aggressive trade enforcement actions against China or any other country seeking to undercut American manufacturing through unfair practices, including currency manipulation, anti-competitive dumping, state-owned company abuses, or unfair subsidies.”

Here is Yellen in her written testimony with members of the Senate Finance Committee:

“The President has committed to opposing efforts by countries to artificially manipulate their currencies to gain an unfair trade advantage. I am supportive of that commitment.”

Yellen was in tune with Biden.

On January 19, Sen. Ron Wyden (D-OR) asked Yellen point-blank about her take on the subject, saying that members of the Finance Committee which he chairs are “concerned about currency manipulation and other tactics that rip off high-skill, high-wage jobs at a time when wage growth has got to be right at the top of our economic agenda.”

Yellen responded with, “the United States does not seek a weaker currency to gain competitive advantage and we should oppose attempts by other countries to do so. The intentional targeting of exchange rates to gain commercial advantage is unacceptable. If confirmed, I will work to implement President-elect — the President-elect’s promise to oppose any and all the attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade.”

That’s what Secretary Yellen said.

But this is what she did.

On April 22, Yellen’s Treasury Department found that the three countries manipulate their currencies. But instead of formally naming them as manipulators, Treasury praised their economic management and said they need to engage more.

The Treasury department’s latest report examined the currency practices of around 20 countries, but the clear takeaway of the Treasury economists was that Vietnam, Switzerland and Taiwan met all of the criteria to be considered a currency manipulator. And while there is no formal punishment for such things, and no country has ever been punished for it, it sends the signal to central banks that stealing cookies from the cookie jar before bed won’t ban you from the cookies, but you might get a stern lecture about it.

The new report is frank and accurate about the costs currency manipulation can inflict upon the economy:

“Five major US trading partners—Vietnam, Switzerland, Taiwan, India, and Singapore—intervened in the foreign exchange market in a sustained, asymmetric manner with the effect of weakening their currencies. Three of these economies—Vietnam, Switzerland, and Taiwan—exceeded the two other thresholds established by the Treasury to identify potentially unfair currency practices or excessive external imbalances, which could impede US growth or harm US workers and firms.”

According to the report, those three countries between them accounted for $157 billion of the U.S. goods trade deficit last year. Using the common rule of thumb that every billion dollars of trade deficit costs us 6,000 jobs yields the estimate of 942,000 jobs lost due to the policies of these three manipulators, says Jeff Ferry, chief economist for CPA.

Yet by refusing to name those three as manipulators, despite meeting the criteria for it, Yellen looks set to downplay currency concerns.

Perhaps the conversations that Treasury will now have with their counterparts in those countries can be used as leverage on other issues, such as the Biden administration’s “working with allies” approach in dealing with China’s mercantilism. We don’t know the answer. But without any known, actual objective to these talks, Yellen’s decision shows that the Biden administration’s approved softer approach on currencies, and the Treasury Secretary’s preference for not disrupting forex market forces.

During her January 22 written testimony to Senate Finance Committee members, Yellen made clear that she wanted the market to dictate the dollar’s direction. “The value of the U.S. dollar and other currencies should be determined by markets,” she said.

If a country is officially named as a currency manipulator, it comes with no immediate penalties, but it does rattle financial markets.

Sen. John Cornyn (R-TX) told Yellen in his written question and answer form that the ​Omnibus Trade and Competitiveness Act of 1988 ​and ​Trade Facilitation and Trade Enforcement Act of 2015 gave the Treasury Secretary authority to address currency manipulation and identified bilateral negotiations as the appropriate recourse in such instances, which is what she is doing. Other parts of the Executive Branch have been wading into these issues now, too. For example, the USTR launched an investigation and issued a report under Section 301 of the Trade Act of 1974 into Vietnam’s currency valuation practices, and the Commerce Department has begun considering currency undervaluation as a countervailing subsidy.

“What are your thoughts on this matter and do you believe these actions by other agencies are outside the original intent of the existing statutes to address currency undervaluation?” he asked her. He seemed against allowing for input from other agencies, preferring to let the final decider by the Treasury Secretary.

She said, “The President opposes attempts by foreign countries to artificially manipulate currency values to gain unfair advantage over American workers. The Biden-Harris Administration will be examining how Treasury, Commerce and USTR can work together to put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage,” adding that it was “critical that we address any issue pertaining to exchange rates in a coordinated manner” across the government.

Countries can manipulate the value of their currency in many ways. The most common is through its Central Bank or Treasury buying dollars in order to drive up its value. Demand for dollar securities – whether it is in American stock listings, dollar money market accounts, or government and corporate bonds, all make their buyer’s currency weaker against the dollar as more of their money is flowing out of the country in order to purchase dollar-denominated securities. Their weaker currency makes their exports cheaper and makes it more costly for them to import from the U.S.

In 2020, eight countries met the criteria for manipulation: Guatemala, Hong Kong, Israel, Korea, Singapore, Switzerland, Taiwan, and Thailand. Together, these countries purchased $446 billion in net official assets, considerably more than the purchases of $160 billion by five countries that exceeded the criteria in 2019, but less than during the peak years of manipulation in 2003–13, when purchases by manipulators sometimes exceeded $1 trillion per year, according to the Peterson Institute for International Economics.

The U.S. Treasury Department released its semi-annual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States on April 16. It called for “enhanced engagement” with the three countries Mnuchin said met the criteria for currency manipulation.

If Yellen is reluctant to be moved on currency issues, then President Biden will have to take charge and require action from other departments. We cannot Build Back Better and foster the middle-class recovery they have been talking about when other countries undercut our industries by manipulating currencies.