US economy

Tariffs by false pretences

Technically, US president Donald Trump did not impose tariffs on Argentine and Brazilian steel and aluminium products: he “restored” them.

In fact, the tariffs (of 25 per cent and 10 per cent, respectively) were imposed by executive order on March 8, 2018 (with an effective date two weeks later) but Argentina and Brazil — along with other, mainly allied, countries — were temporarily exempted under a carve-out provision announced by Robert Lighthizer, the US Trade representative, hours before the tariffs were due to take effect.

The legal basis cited in Mr Trump’s tariff order is Section 232 of the Trade Expansion Act of 1962 which, under certain circumstances, allows the president to impose tariffs based on the recommendation from the US Secretary of Commerce if “an article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security”. While this section is rarely used, it is unlikely that it will be subject to any domestic challenge.

Internationally, the picture is less favourable to the US position. The Section 232 tariffs are, prima facie, in violation of Articles I (“most favoured nation”) and III (“national treatment”) of the General Agreement on Tariffs and Trade, with the sole loophole being provided by an Article XXI exception for national security, which allows member nations to take actions to protect their national security in specific realms (eg, regarding fissionable materials; relating to the traffic in arms, ammunition and implements of war; actions taken in war or other emergency in international relations; or to prevent the abrogation of obligations under the United Nations Charter).

Predictably, China, the EU, Canada, Mexico, Norway, Russia and Turkey challenged the 232 tariffs at the WTO. However, a WTO determination may take years.

Having been exempted at the last minute, neither Argentina nor Brazil joined the WTO litigation. However, both countries paid an upfront price to elude the tariffs. In May 2018 they subjected themselves to voluntary quotas of steel and aluminium product exports to the US. And herein lies the problem. Section 232 does not give the US president the right to change a quota into a tariff beyond 180 days from the quota’s establishment and, any way we count, that period has lapsed.

So, devoid of the (already legally shaky) 262 contrivance, the administration had to replace “national security” with a new bogeyman: “currency manipulation”.

No order has yet been published and we only know about the tariffs from a presidential tweet: “Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries… ”

Designating a country as a currency manipulator is a process. It is not enough for the president of the United States to say that a country “presid[ed] over a massive devaluation”.

In fact, under the 1988 Omnibus Foreign Trade and Competitiveness Act, the United States Secretary of the Treasury is required to “analyse, on an annual basis, the exchange rate policies of foreign countries . . . and consider whether countries manipulate the exchange rate between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade” and that “If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments”.

No such process was followed by the Treasury. If it had been, the Treasury would have found the following: Argentina did not manipulate the value of its currency downwards, quite the opposite — as a financial crisis resulting from fiscal imbalances led Argentina to lose market access and throw itself on the mercy of the IMF for a bailout, there was a run on the peso which left the central bank’s reserves severely depleted.

Argentina did not encourage this. Quite the opposite. First, being a dual-currency economy (peso-spending/dollar-saving), FX volatility frustrates policymakers’ efforts to reduce the country’s very elevated inflation level (by denying the economy even one nominal anchor).

Second, Argentina is in the middle of a sovereign debt crisis with the majority of its public debt being denominated in US dollars. A devaluation only exacerbates Argentina’s credit distress by further increasing is debt/GDP ratio.

Third, Argentina took harsh measures to avoid further foreign exchange depreciation, including the imposition of unpopular capital controls.

Fourth, as part of its IMF bailout Argentina agreed to (and complied with) an austere monetary policy of almost medieval character (zero increase in the money supply), which resulted in maintaining positive real interest rates.

Finally, the parallel exchange rate that resulted from the above capital controls is even weaker than the value exporters get as payment for their goods and services. A return to a free float of the peso would result in a significantly weaker peso. Thus, all of the policies the Argentine government “presided over” were, out of self-interest, aimed at increasing the value of the peso. If the Argentine government indeed manipulated the value of the currency, it manipulated it up, not down.

The Brazilian situation is more subtle. Being a bigger, more diversified, and less financially stressed economy, the Brazilian real trades in a virtually free float, determined by supply and demand, with occasional transparent central bank interventions to avoid disruptive movements.

Sure, the real devalued by almost 12 per cent over the past six months, but this is hardly a remarkable move for a free-floating emerging market currency (the Turkish lira is Exhibit A).

I concede that the real’s drop was partly due to policy: in fact, having just emerged from a painful two-year recession and with inflation at historic lows, Brazil implemented a more accommodative monetary policy than had been the norm. The goal was to stimulate credit demand (and, hence, output) with the collateral benefit of reducing the government’s interest expenditures.

Although interest rates have remained positive in real terms at all times, currency depreciation was always the downside of the monetary stimulus policy. I cautioned about the risks of easing too much too quickly, and still forecast slightly tighter monetary conditions for 2020, which may lead to real exchange rate appreciation.

There plainly was no manipulation, certainly not according to any of the criteria the Treasury is supposed to rely on.

So, what impelled Mr Trump to punish two allies by calling them currency manipulators? I think the answer is betrayed by a little-noticed portion of the tweet in question, where Mr Trump calls the two countries’ respective devaluations “not good for our farmers”.

How on earth can cheaper steel and aluminium imports harm US farmers? They cannot, of course. The punishment is, in reality, a consequence of Chinese retaliatory tariffs against the US which did harm US farmers to the extent that their soybean exports to China were swiftly substituted with Brazilian and Argentine product.

So, no currency manipulation here: punishing Argentina and Brazil with national security-inspired tariffs on steel and aluminium on grounds of currency manipulation is a thinly veiled effort to get those two countries to “do a deal” by curtailing their soyabean exports to China (a trade over which the Administration has no jurisdiction) and restore Mr Trump’s support among a key constituency, which views itself as collateral damage of the president’s trade wars.

Carlos Abadi is managing director of DecisionBoundaries, LLC, a New York-based international financial advisory firm.

beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.


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