INTERFIMA, Roubini EconoMonitor
We started the week with President Trump accusing, via Twitter, Brazil and Argentina of currency manipulation and unfair competition with farmers in his country. In response, he would reestablish full tariffs on steel and aluminum exported from both countries to the US market.
At the time of this writing, nothing concrete has yet been issued by the US government bodies, and in this case, details matter a great deal to assess potential impacts. However, the event is significant enough to try to understand what the Twitter broadcaster wants.
Let us remember that in May of last year, Argentina and Brazil were able to mitigate the specific impact in their cases of the measures President Trump established on steel and aluminum imports. Argentina announced that it would apply a voluntary cap on its exports of those products to the US, at levels compatible with previous years’ volumes, in exchange for escaping new tariffs. Brazil, for its part, also accepted quotas for its steel sales as a counterpart of not suffering an additional 25% tariff, while choosing to swallow the 10% surcharge on aluminum.
Apparently, it would be these arrangements that Trump would be announcing the intention to suspend. Why? For what? Let’s try to thread the tweet…
First, the charge of exchange rate manipulation makes no sense. By the way, the US Treasury has been following three criteria for many years to classify another country as a currency manipulator: in addition to be a significant US trading partner, the country has to be simultaneously achieving significant bilateral trade surpluses, displaying total current-account surpluses, as well as to be making one-way currency interventions to keep its currency devalued. Not that President Trump follows such criteria, as China has recently been accused of currency manipulation although, unlike a few years ago, China is currently far from meeting those criteria simultaneously.
But the contrast with recent experiences in Brazil and Argentina is stark. Argentina was forced to impose strong restrictions on capital outflows to prevent erosion of reserves and catastrophic currency devaluations. In Brazil, interventions by the Central Bank to reduce volatility have been unilateral in the direction of… curbing currency devaluation.
It is true that the strengthening of the dollar against other currencies infuriates Trump. He took advantage of Monday’s tweet to send another message to the Federal Reserve to continue loosening its monetary policy. Paradoxically, the more threatening tweets and decisions like the one announced, the greater the level of uncertainty that this year has already negatively affected investments and global economic growth, the greater the search for refuge in dollar bonds and… the stronger the dollar!
What about the effect of the suspension of agreements for the domestic steel and aluminum industry in the US? It should be remembered that last year the industry itself was in favor of the arrangement then established, as it ultimately benefits from the importation of steel semi-finished products from Brazil.
Strictly speaking, as approached in a lengthy article in the Financial Times last Sunday, Trump’s struggle to revive the US rust belt through protectionism has failed. The poor performance of manufacturing investments in the country this year, partly explained by the uncertainty generated by the US government-led trade war, has had negative effects that obscure potential increases in local production and employment in the supposedly beneficiary segments. The economy and employment performance in the country has been supported by other factors despite protectionism.
OK. Probably President Trump remains convinced of gains from raising industrial tariffs. What about the reference to farmers? Mr. Trump may have in mind the increases in sales of soybeans and other agricultural products by Brazil and Argentina to China as a “trade diversion” created by Chinese retaliation against US agricultural exports. As we have seen at other times – such as linking with migratory affairs in the case of Mexico in June – he may be thinking of associating a possible Twitter rollback with something in that area to show farmers in his country. Increases in the share of US ethanol in the Brazilian market? What more of the Trump administration’s agenda has not been graciously granted by the Bolsonaro government?
Finally, there remains the possibility of seeking to reinforce the “domestic political narrative” that gave him electoral victory. But in this case, the steel people tend to dislike, judging from last year. Additionally, more US ethanol in Brazil would hardly appease farmers’ dissatisfaction with the consequences for them of the trade war with China.
It is worth recalling the opinion issued by the US Court on International Trade last month that Trump violated the use of section 232 of the 1962 law giving him the prerogative to take trade measures in cases of threat to national security. The US government would have ignored a minimum threshold of 90 days to impose or change tariffs when it decided to double tariffs on steel imported from Turkey in August last year. Similar contestation has been made regarding the threat of imposing car tariffs on the European Union. This is the first episode of domestic court legal challenge to the way President Trump has been using that legal prerogative.
In our view, while clarification and formalization of measures do not come, I have to agree with a former colleague on the IMF Executive Board of Directors, the Argentine Hector Torres, who in a comment Monday on LinkedIn noted: “President Trump believes that governments of Brazil and Argentina are manufacturing currency devaluations to damage US farmers… and respond by raising tariffs on imports of steel and aluminum… the premise is wrong and the reaction folly! ”. Not without first contributing to the uncertainty that, as we have observed, has already negatively impacted the global economy.
Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.