The Obama Administration tried restarting US-Russian relations with
little success. The inability to secure the European flank weakened
the pivot to Asia. The Trans-Pacific Partnership was to solidify
the economic dimension of the pivot. Now that the US formally has
withdrawn from TPP negotiations, many are unsure of the status of this
initiative.
Less than ten days ago, Susan Thorton was named the acting Assistant
Secretary for East Asian and Pacific Affairs. She announced
that the pivot to Asia was dead. Perhaps it is the terminology. The
Obama Administration had already moved from “pivot” to
“reposition.” In any event, an important shift toward
Asia is continuing to take place.
How can the pivot to Asia not continue? Half of the US top ten
trading partners are in Asia. More than $5 trillion of trade flows go
through the South China Sea. Within a year of two, Asia will likely be
home to five of the world’s largest economies. Five of the top ten most
populated countries are already in Asia.
However, without TPP, the risk is
that the US reposition to Asia takes on a more militaristic dimension, which
will play on some ideas in China that the US pivot is really aimed at containing it. Last month, US General
Reid, who is in charge of the Air Force’s nuclear force and bombers indicated
the US was continuing to deploy its most advanced weapons in the region.
The Marines have sent a squadron of F-35 joint strike fighters to a base in
Japan, according to other reports.
It had appeared that the Trump Administration was gearing up for a more
confrontational approach with China. Trump threatened to jettison the
one-China policy. He threatened to label China a currency manipulator (his two immediate predecessors backed off from
similar campaign promises). However, with little contrition, the Trump
Administration has made its own pivot. It
has signaled an acceptance of one-China without new concessions from China
officials (unless one considers the 38 new trademarks granted to Trump, which covers a range of businesses, including hotels,
insurance, bodyguards and escort service, according to press reports, after it took a decade to secure one
trademark).
US Treasury Secretary Mnuchin, attending his first G20 meeting, made some
comments yesterday that seem to suggest that China will not be cited as a
currency manipulator at the first opportunity to do so next month. At the insistence of Congress in the face of no
country being cited as a manipulator for more than 20 years, the US Treasury
Department, under the previous Secretary Lew, developed a quantifiable metric,
that included having a large trade surplus with the US, a significant overall
current account surplus, and persistent intervention on one side of the
market.
Mnuchin indicated he is committed to the process and criteria he
inherited, and will not pre-judge. But we can. China simply
does not meet all of the criteria. It does have a large bilateral trade
surplus with the US (though it may be a bit smaller if one were to exclude
exports by US-owned affiliates in China to the US). Its current account
surplus as less than 2% of GDP in 2016, down from 3% in 2015. By way of
comparison, Germany’s current account surplus was 8.4% in 2015 and 8.6% last
year. Japan’s current account surplus was 3.3% of GDP in 2015 and fell to
2.7% in 2016. Note too Japan’s current account surplus is driven by its
investment income not trade.
The PBOC does appear to have intervened actively, though the IMF (and
others) have called on it to be more transparent in its operations.
However, the intervention is aimed at slowing the pace of depreciation. It has
lost about one trillion dollars in reserves trying to offset or smooth the
capital outflows (some of the decline is
due to valuation and specifically the decline of the euro since mid-2014).
Lastly, there had been some talk that the Trump Administration
would pivot away from “manipulation” criteria to a focus on
valuation. Such a shift, however, would likely be more important for
German, and maybe some emerging market currencies, like Korea and Taiwan, but
it might not bolster the case to intensify pressure on China. When China
joined the SDR formally at the end of last year, the IMF argued that in its
assessment that yuan was no longer undervalued.
Given the debt, and housing “bubble” some economists see the yuan
over-valued.