Be careful what you ask the IMF for

The Trump administration should be careful about what it is asking for from the International Monetary Fund. In his first contact with IMF Managing Director Christine Lagarde, U.S. Treasury Secretary Steven Mnuchin indicated that the Trump administration expects frank and candid exchange rate analysis from the IMF of its member countries’ policies. Seemingly, however, the thought has not crossed Mnuchin’s mind that if the IMF were to carry out its exchange rate policy surveillance function properly, it might very well single out the United States as a major obstacle to reducing today’s global trade imbalances.

In asking the IMF to be more frank in its exchange rate analysis, one has to presume that Mnuchin would like the IMF to provide the U.S. Treasury with cover to declare countries with large bilateral trade surpluses with the United States as currency manipulators. In particular, one has to suppose that he has foremost in his mind countries like China, Germany and South Korea, which all have large trade surpluses. Were the U.S. Treasury to declare such countries as currency manipulators, that would trigger U.S. bilateral negotiations with those countries as to how they might adjust their policies so as to reduce their trade surpluses.

While the IMF certainly might be critical of some aspects of German and Chinese economic policies insofar as they might contribute to global trade imbalances, it is very unlikely that it would go nearly as far as the Trump administration would like it to go. To be sure, the IMF might exhort the German government to adopt a more expansionary fiscal policy and to be more accepting of higher inflation in Germany to reduce its external current account surplus that now amounts to a staggering 9 percent of GDP. However, the IMF is likely to remind Mnuchin that Germany is a member of the Eurozone, and as such does not have a currency or a monetary policy of its own. It is also likely to alert him to the financial market dangers of having Germany leave the Euro.


U.S.Treasury Secretary Steven Mnuchin speaks at a press briefing at the White House in Washington, U.S., February 14, 2017. REUTERS/Kevin Lamarque

The IMF is also likely to disappoint Mnuchin in its analysis of the Chinese economy. While the IMF might exhort China to rebalance its economy away from an export-led growth model to one more reliant on domestic consumption, it is highly unlikely that it would criticize China for manipulating its currency to gain an unfair competitive advantage. Rather, it is likely to point out that the IMF considers that the Chinese currency is presently at approximately fair value and that over the past 18 months China has burned through more than $1 trillion in its international reserves to prevent the Chinese economy from unduly weakening.

If the IMF were to be even-handed in its exchange rate policy surveillance, the Trump administration’s proposed economic policies for the United States would almost certainly come in for serious criticism. The IMF must be expected to note that those policies would accentuate global trade imbalances and lead to an overly strong dollar. This would be of particular concern to the IMF at a time when the emerging market corporations have very high levels of U.S. dollar-denominated debt that they would find difficult to service were the U.S. dollar to strengthen further and were capital flows to reverse.

One must suppose that Mnuchin would not relish being told by the IMF that two basic pillars of Trumponomics would more than likely lead to a higher dollar and to a worsening of global trade imbalances. The first is the administration’s intention to move to a much more restrictive trade policy that would include higher import tariffs and possibly a border tax adjustment. To the degree that those policies restricted import demand, they would tend to boost the U.S. dollar.

The second is the administration’s proposed budget policies that would involve both large tax cuts and substantial defense and infrastructure spending increases. Those policies are almost certain to lead to a widening of the U.S. budget deficit that would risk the re-emergence of a U.S. twin-deficit problem as the U.S. savings rate would decline. At a time that the U.S. economy is close to full employment, such a budget policy would almost certainly force the Federal Reserve to raise interest rates at a faster pace than it is presently planning. That in turn must be expected to propel the U.S. dollar ever-higher.

Before being first to cast a stone in a trade or currency war, Mnuchin would do well to reconsider what Trumponomics might do to global trade imbalances. Rather than trying to enlist the IMF to help the U.S. beat up on its trade partners, Mnuchin might be better advised to engage those trade partners in a constructive dialog as to what policy action might be taken by all countries, including the United States, to reduce the world’s trade imbalances.


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