Eitan Urkowitz: This is Eitan Urkowitz at the Peterson Institute for International Economics. Joined with me is Fred Bergsten, Director Emeritus and Senior Fellow here at the Institute. Thank you for joining me, Fred.

Fred Bergsten: Glad to do it.

Eitan Urkowitz: So, President Trump said that he would label China a currency manipulator but he seems to have backed off from that. The Wall Street Journal is now reporting that President Trump is going to be combating currency manipulators through another method. So, why did he back off?

Fred Bergsten: President Trump backed off because he realized that China was no longer a currency manipulator. For over two years now, China has not been intervening to keep its currency weak against the dollar as they had done for much of the previous decade. They are in fact on the other side of the market. China has been intervening heavily to keep its currency from getting weaker and to keep the dollar from getting stronger.

What that does is improve the US competitive position. So, President Trump upon taking office realized the reality that the Chinese are now actually helping out in achieving his goal of limiting US trade deficits, he therefore wisely has chosen at least so far not to label them as a currency manipulator.

Eitan Urkowitz: So, they have said that they are going to have the Commerce Secretary label currency manipulators in the future as an unfair subsidy. So what does that mean?

Fred Bergsten: What the administration is apparently planning to do is to treat currencies of other countries that are undervalued as a result of manipulation by their countries as export subsidies. Now, we have standard rules that apply to combating export subsidies by other countries: tax subsidies, credit subsidies, all kinds of subsidies.

In economic terms, undervalued currencies are very much a subsidy just like those other forms. And, if countries maneuver to undervalue their currencies through manipulation, then we should in fact label them as subsidies and put on countervailing duties against them. That’s the basic idea.

The question is whether US law and international trade law permit countervailing duties in that circumstance. There is big debate among lawyers on both the domestic front and the international front, so the idea that apparently is coming forward, while I support it, and think it’s a good idea will be subject to a lot of controversy and legal debate.

Eitan Urkowitz: So, which international organizations right now or domestic organizations are in charge of handling the issue of currency manipulation and which would handle this if you were to label this as an unfair subsidy?

Fred Bergsten: Currency manipulation within the US is now handled by the Treasury Department. They are mandated by the Congress to put out reports twice a year indicating which foreign countries are manipulating. The law that was passed just about a year ago actually specifies specific criteria against which to judge if a country is manipulating in that way.

In its latest report, Treasury rightly, in my view, indicated that five countries meet two of the three criteria, none meets all three, so none were indicted.

The question is whether under this new approach of using countervailing duties against manipulation, the authority to determine currency undervaluation, currency manipulation would rest continually with the Treasury Department or pass to the Commerce Department, which implements countervailing duties. That sets up a huge turf fight within the administration. To my knowledge, it’s not yet clear how that would be handled. Congress might want to weigh in as it has two or three times in the past with legislation on this issue, and so we’ll just have to see, but that will be a major question. We can count on the fact that Treasury will fight vigorously to avoid letting Commerce or anybody else invade its turf by determining whether a foreign currency is undervalued.

Eitan Urkowitz: Interesting. So, you and Joe Gagnon came out with a paper a few years ago arguing for a similar policy to what the Trump administration is now expected to put forward. Can you tell me a little bit more about that?

Fred Bergsten: Yeah, Joe Gagnon and I in the first paper we wrote jointly on this topic four years ago did propose exactly what’s being contemplated as one of a series of steps to deal with the rather major problem of currency manipulation. Currency manipulation incidentally as I said about China earlier is now in remission among most countries. But it could easily come back and it’s still important to put policies in place to deter it.

Joe and I proposed the countervailing duty approach as one of a series of measures to deal with the issue. The countervailing duty approach, as reportedly now considered by the administration, is actually the most modest step in that arsenal of measures. The reason is that countervailing duties only apply to a very tiny percentage of US imports. We now have imports that total about $2.5 trillion, only about $40 billion are covered by countervailing duties. For that to apply, a company or an industry has to come in, demonstrate that the foreign currency is manipulated, demonstrate that they are injured by that practice, which is not so easy as their economies now full employment doing reasonably well.

So, I would not expect a whole lot of the business to come in through this route. At the same time, it is a clear warning shot across the bow of the countries who manipulate their currencies to keep them under value. So, it’s a useful first step I would say as a deterrent and it could have wide-ranging effect on China or anybody else who contemplate going back to currency manipulation again in the future.

Eitan Urkowitz: Thank you, Fred.