14 AUGUST

The immigration nation?

President Trump on Monday fired another shot in a protracted broadside on the nation's immigration system, issuing a new rule targeting legal immigrants. The move has expanded the definition of who is considered a "public charge," someone the government says could become dependent on its programs. Immigrants who use government services like food stamps, Medicaid, or housing vouchers would be considered a burden on taxpayers and ineligible for visas or permanent residency.

This comes in the wake of heightened tensions surrounding immigration following raids targeting hundreds of undocumented immigrants in the past fortnight and a racially-motivated mass shooting in El Paso, Texas. While the president has often railed against migrants arriving at the US-Mexico border, the new regulation reflects an increased focus on immigration in the lead up to the 2020 election.

NEWS WRAP

Season's duties

The United States is delaying imposing tariffs on some imports from China until 15 December citing "health, safety, national security and other factors". The products include mobile phones, laptops and video game consoles. President Trump said that the delay was in part to avoid hitting American shoppers this Christmas. READ HERE
Australia is considering joining military operations in the Strait of Hormuz at the request of the United States. Secretary of State Mike Pompeo said he hoped Australia would partner with America on "some of the most pressing foreign policy challenges of our time" including "Iran's unprovoked attacks on international shipping in the Strait of Hormuz". Director of Foreign Policy and Defence Ashley Townshend spoke to Australian Financial Review and said "Canberra should redouble its efforts to remind Washington that Asia, not the Middle East, is where our most important priorities truly lie." READ MORE HERE
The Trump administration has rolled back protections for endangered species. The Endangered Species Act, a landmark act from the Nixon administration, contributed to saving the bald eagle, the grizzly bear, and the American alligator. The change removes 'critical habitat' protections and will open the way for mining, oil and gas drilling and development in protected areas. For the first time, financial considerations will be taken into account when approving projects that impact threatened or endangered species. READ MORE HERE
Trade, China and the Persian Gulf dominated discussions during the annual Australia-United States Ministerial Meetings (AUSMIN) held in Sydney. Senior fellow Charles Edel spoke with ABC's Patricia Karvelas about the meeting, NATO's role in the Indo-Pacific, the importance of protecting maritime shipping and protests in Hong Kong. WATCH THE FULL INTERVIEW HERE

Poor kids are just as bright and just as talented as white kids.

Former Vice President Joe Biden
During a town hall speech in Iowa while speaking on education and the need to challenge students.
8 August 2019

ANALYSIS

Currency wars lack real weapons

Stephen Kirchner
Director, Trade & Investment Program

Global financial markets have been unsettled by claims China has devalued its currency against the US dollar, with the US Treasury responding by declaring China a ‘currency manipulator'. It is not surprising that exchange rate policy has been caught-up in the US-China trade dispute. However, for all the talk of a ‘currency war', exchange rates are difficult to weaponise.

China has long managed its exchange rate, with varying degrees of flexibility. It was fixed with respect to the US dollar from the mid-1990s until July 2005, but has been more flexible since then.

In August 2015, China sought to introduce a more market-based approach to setting the yuan’s value, accompanied by a 2 per cent devaluation. But Chinese policymakers were unhappy with the resulting volatility and quickly reverted to a more managed approach in January 2016.

The best gauge of whether a currency is being manipulated is the magnitude of official intervention in the foreign exchange market and the resulting change in foreign exchange reserves.

A fixed exchange rate often requires heavy intervention to maintain it against market forces, which is why the United States labelled China a ‘currency manipulator’ in the 1990s, but the label has become an increasingly poor fit for China.

It is difficult to argue that China’s currency has been systematically undervalued in a manner designed to boost its exports. In recent years, China has been intervening to support the value of the yuan to stem capital flight.

China’s recent management of its exchange rate is designed to accommodate market forces while maintaining capital controls and promoting domestic economic stability.

If China enjoyed a floating exchange rate like Australia’s, there is little doubt financial markets would have taken its exchange rate lower, perhaps dramatically so, in response to the growing trade war with the United States. Far from intervening to devalue the Yuan, the Chinese are simply doing less to stand in the way of a market-led adjustment.

The US government has traditionally advocated flexible exchange rates because they are more consistent with free and open international trade.

But under the Trump Administration, the United States has sought commitments from China that it will not allow its exchange rate to depreciate as part of any trade deal. The United States is asking China to manipulate its exchange rate in US interests.

The Omnibus Trade and Competitiveness Act of 1988 provides for the US Treasury to designate countries as ‘currency manipulators’. The criteria for manipulation are: (1) a significant bilateral trade surplus with the United States; (2) a material current account surplus; and (3) persistent one-sided intervention in the foreign exchange market.

In fact, the first two criteria are not necessarily inconsistent with a floating exchange rate entirely determined by market forces. Only (3) is a reliable indicator of manipulation.

While China satisfies (1), it does not satisfy (2) or (3). Having ignored its own criteria, we have every reason to believe the US Treasury acted politically in declaring China a manipulator.

Designating another country a manipulator has no implications other than requiring Treasury to enter into consultations, either bilaterally or through the International Monetary Fund.

For its part, the United States effectively has no exchange rate policy so long as the Federal Reserve conducts a monetary policy focused on targeting domestic inflation independently of the Treasury and the president.

The United States has notionally adhered to a ‘strong dollar policy’ since 1995, but the policy was entirely rhetorical. The Trump administration has shifted this rhetoric, but the US still has no effective exchange rate policy.

While the US Treasury could intervene in foreign exchange markets, with or without the Federal Reserve, such intervention would have little lasting effect and leave the United States itself vulnerable to the charge of manipulation.

The United States has deep and liquid foreign exchange and capital markets that are a key economic strength, not least because they are a bulwark against attempts by the US or foreign governments to manipulate exchange rates and interest rates.

Suggestions that China might sell its holdings of US Treasuries to punish the United States ignore the fact that even its massive holdings are just a drop in the bucket of US capital markets. China selling US Treasuries would just be a buying opportunity for the rest of the world.

While the Trump Administration could intervene in foreign exchange markets and seek to politicise monetary policy, attempts to set exchange rates and interest rates at odds with economic fundamentals ultimately fail.

Fixed exchange rate regimes eventually succumb to market forces. Managed exchange rates like China’s only succeed to the extent that they accommodate those forces. Floating exchange rates like Australia’s accommodate market forces in real time.

A ‘currency war’ may give rise to increase volatility in financial markets, but it lacks effective weapons and won’t change underlying economic fundamentals.

DIARY

The week ahead

Wedneday, 14 August: Trump will tour the Shell Pennsylvania Petrochemicals Complex and will then give a speech on "America's Energy Dominance and Manufacturing Revival".
Thursday, 15 August: Trump has a campaign rally in Manchester, New Hampshire.
The House and Senate are out of session until Labor Day (Monday, 2 September)

EVENT

Averting Crisis: American strategy, military spending and collective defence in the Indo-Pacific

The United State's defence strategy in the Indo-Pacific is in the throes of a serious crisis. Faced with an ever more capable and assertive China, the US military urgently needs to refocus on the requirements of great power competition and rebuild its strength after years of costly conflict in the Middle East.

In a special report from the United States Studies Centre, Ashley Townshend, Brendan Thomas-Noone and Matilda Steward argue that in the absence of hard choices by US leaders to spend more or do less in the world, the United States will confront rising levels of strategic risk with destabilising consequences for the Indo-Pacific. To avert a deeper crisis, the report authors recommend that Australia take steps to advance a strategy of collective defence to offset shortfalls in the United States' regional military position and bolster a favourable balance of power.

Please join the authors for the launch of Averting Crisis: American Strategy, Military Spending and Collective Defence in the Indo-Pacific followed by a moderated panel discussion with Lisa Murray from The Australian Financial Review.

DATE & TIME
Monday, 19 August 2019
6.00pm–8.00pm

LOCATION
Federation Ballroom, Hyatt Hotel, Canberra

COST
Free, but registration required.

Register