A Different Kind of Pivot to Asia

The best-known version of President Barack Obama’s “pivot to Asia” involved an attempt to rebalance U.S. foreign policy away from the Middle East and toward Asia. A second, lesser-known, political version involved the pivot from harsh campaign rhetoric on China to a more practical approach. Such maneuvers have the potential to be embarrassing when performed in public, and usually takes place in the window of time between the conclusion of an election and the start of confirmation hearings for nominees. Obama attempted both pivots. President-elect Donald Trump and his team appear to be following this tradition.

The first step in the political maneuver, employed by both Obama and Trump, is to excoriate Chinese economic policies. Blame them for industrial decay in the Midwest. Promise to find China a currency manipulator. Vow to apply tariffs, and argue that the incumbent president was too weak or scared to take on China. If executed correctly, the maneuver helps deliver critical electoral caches, such as Michigan, Ohio, and Pennsylvania.

Fortunately for the presidents-elect, the greatest ensuing potential for embarrassment then lies with cabinet nominees, not with them. Tim Geithner,  Obama’s first Treasury secretary, got caught in his confirmation hearings on the question of whether China would or would not be officially named a currency manipulator. Obama had signed a pledge that he would make that finding upon taking office. Eight years later, it has yet to happen.

In the current rendition, CNBC asked Treasury secretary nominee Steven Mnuchin about Trump’s currency manipulation promise. Mnuchin replied:

Well, I would just say … Wilbur [Ross, Commerce Secretary-designate] and I are going to work very closely together … so there [are] enforcement aspects of trade agreements that are in Commerce and there [are] enforcement acts in Treasury. So if we determine that we need to label them as a currency manipulator, that’s something the Treasury would do…

Ross, who appeared with Mnuchin on CNBC, had his own role in the maneuver, tempering Trump’s campaign promises to apply a 45-percent tariff on Chinese goods:

Everybody talks about tariffs as the first thing. Tariffs are the last thing. Tariffs are part of the negotiation. The real trick is going to be [to] increase American exports, get rid of some of the tariff and non tariff barriers to American exports.

One might think that the campaign’s China bashing would have set the Chinese against the incoming Trump administration. Based on a very limited set of recent conversations, though, the Chinese attitude seems quite different. They see Trump as someone with whom they can bargain, someone who likes to cut deals, as Ross’ remarks seem to affirm. That, of course, was before Trump’s Taiwan chat of last week.

So the Chinese have begun the bargaining game. They can counter U.S. threats with quiet indications that aggressive U.S. moves would meet with retaliation (like the retaliation against Obama’s 2009 tire tariffs). And they await the negotiations.

For all the similarities to events eight years ago, however, there are some important differences. In 2008, China’s currency, the renminbi (RMB), was entering a crisis-induced pause in the midst of a long stretch of appreciation (i.e. Chinese goods getting more expensive). At that time, if one had wanted to make the case that China was manipulating its currency, one would have pointed to China’s ever-accumulating mountain of foreign exchange reserves. Those reserves kept the RMB from rising even faster.

The present situation is quite different. In early 2014, the RMB began to depreciate. This was not the result of Chinese manipulation. If anything, the Chinese were working hard to counter the depreciation. In the last couple years, China has spent its reserves, which are down from roughly $4 trillion to $3 trillion, in an effort to prop up the currency. Out of concern about the decline of the RMB and the exodus of money, China has recently gone further by putting limits on Chinese overseas deals. China’s interventions have been aimed at maintaining domestic growth and stability, but have had the effect of making Chinese goods look more expensive, not less.

This means that on currency, the United States. needs to be careful what it asks for. If it wants a sharp appreciation, it won’t get it. China would be in no position to deliver, since $1 trillion proved insufficient to slow the decline. If the U.S. demands that China stop intervening, the Chinese could oblige and let the RMB plunge. In that case, the Trump administration might get what it asks for, but not what it wants. It remains to be seen whether the Trump administration will execute the traditional political pivot toward a more sensible policy. Yet another important Asia call for them to make.

Photo credit: JOHANNES EEE/AFP/Getty Images