Forex manipulation: Setting the record straight after US Treasury adds India to its currency watch list

India’s increased purchases of foreign exchange reserves and its sizeable bilateral trade surplus with the US has come under heightened scrutiny as the US sought to put India under its ‘monitoring list’ of potential currency manipulators.

Contrary to much scepticism and concern that has confounded Indian policy makers following this decision, I argue that the present move is not only theoretically and operationally flawed but is also of little potential consequence to India’s trading and financial interests.

 Forex manipulation: Setting the record straight after US Treasury adds India to its currency watch list

Representational image.

US Congress and exchange rate manipulation

The Trade Facilitation and Trade Enforcement Act, 2015 (TFTE) and Omnibus Trade and Competitiveness Act of 1988 comprise the core of Congressional legislation dealing with the questions of exchange rate manipulation.

It primarily prescribes for reporting obligations of the US Treasury as regards exchange policies of countries that the US considers to be its ‘major’ trading partners. In the event that such trading partners maintain, beyond a certain threshold, (a) bilateral trade surplus with the US, (b) conduct sustained forex interventions and (c) hold an over-all current account surplus, the law enjoins the US Treasury, as a further step, to initiate ‘enhanced bilateral engagement’ or ‘expedited negotiations’ with such partners.

What is the content and objective of such ‘enhanced engagement’? It is to ‘urge’, ‘advice’ and further ‘develop’ agendas for the erring countries to suitably adjust their currency and trade imbalances. As a matter of last resort and only upon failing such engagement, the TFTE  prescribes for certain sanctions in the nature of withdrawal of funds, closing of US procurement markets, pushing for additional International Monetary Fund (IMF) surveillance and red flagging a particular country’s currency practices for future trade agreements.

So far no such engagements or negotiations have transpired between the US and any of its major trading partners.

‘Monitoring list’ and counter measures

From a reading of the twin sets of legislation dealing with the questions of exchange rate manipulation two things follow clearly. First, the move to establish and prepare a ‘monitoring  list’ comprising of countries and their currencies is purely an executive act and as such, does not hold any material significance under US law. In fact, a ‘monitoring list’ of whatever scope is not even envisaged under either Congressional legislation highlighted above.

Secondly, the term ‘currency manipulator’ is neither rooted in nor derived out of any specific legal basis under the US statutes. It operates purely as a colloquial label and in several respects an unsatisfactory one at that. Accordingly, no direct or immediate counter measures follow as a result of such labelling or inclusion into the list. Therefore India’s presence in the list is neither alarming nor decidedly consequential for the conduct of domestic monetary and macroeconomic policies.

More importantly, even if India was subsequently to be pursued for enhanced bilateral engagement or negotiations, concerns regarding the impact of possible US sanctions or counter measures would be equally unfounded. First, the sanctions regime envisaged under the TFTE is distinctly specific in scope and does not envisage any measures beyond what is allowed for under the act. In this respect, none of the four possible sanction prescriptions contemplates for trade related counter measures.

Second, with respect to fears regarding the imposition of trade related counter measures, outside of the TFTE, it is highly questionable as to whether such a step will be in consonance with the US mandate and obligations under the World Trade Organisation (WTO) framework agreements. Any such course of action by the US will only provide India with further ammunition to approach the WTO and it is unlikely that such measures will withstand scrutiny.

Inadequate criteria and flawed application

Political and economic consequences aside, the very criteria adopted under the TFTE for trigging the obligation of enhanced scrutiny and its specific application to the present case is highly inadequate if not entirely dubious. Indeed, if unfair trade advantages arising out of currency manipulation is the real concern, what is truly of significance is not the erring country’s quantum of bilateral trade surplus with the United States (criteria a) but an assessment of the overall trade surplus of the country with its other trading partners. Several studies have advanced the proposition that a particularly skewed bilateral trade surplus between country A and B could be a result of several factors such as specific labor or industrial policies, that are unrelated to a country’s currency or exchange rate policy.

Similarly, scrutinising foreign exchange interventions conducted within a timeline of twelve months (criteria 3) hardly captures the intricacies of global financial cycles and the resulting volatility of international capital flows. Particularly, it does not take into consideration that in the face of excessive capital flows and exchange rate volatility confounding countries in the last decade, foreign exchange interventions have come to the aid of several emerging market economies. In such circumstances, foreign exchange interventions have been singularly used as a tool towards sustaining domestic financial and monetary stability as opposed to achieving a particular exchange rate.

Comparably, the application of the TFTE criteria to India and its macroeconomic policies is equally ambiguous. The fact that India’s bilateral trade surplus with the US stands at $23 billion (threshold is $20 billion) is largely peripheral especially if one were to simultaneously observe the price movement of the Indian currency. Contrary to what one might anticipate, during the period under review, the rupee notably appreciated against the dollar, thus making Indian exports far more expensive than its competitors - a fact acknowledged in the official report as well. Therefore, any causal connection between increasing trade surplus and domestic currency measures is not only untenable but also misguided.

Moreover, India’s foreign exchange interventions in 2017 (around $56 billion, i.e. 2.2 percent of GDP) which the report suggests as particularly troublesome (threshold is two percent) was undertaken in the backdrop of a particular context and in view of a certain objective. Increasing capital flows and resulting exchange rate volatility had necessitated central bank intervention in the currency markets, so as to respond to speculative attacks and provide a hedge against volatility. Exchange rate management was neither explicitly nor implicitly an objective of such policy.

That international monetary and trade relations among nations are ordinarily a reflection of power and influence underlying the structures of world order is certainly a no-brainer. A strong currency and a large economy often become vehicles for political and economic domination over a nation’s bilateral and multilateral partners. In this respect, the present report and its particularly ill-conceived decision to insinuate India and its exchange rate polices only lays bare the blatant exercise of authority and dominance by an economic hegemon. As against buckling under pressure, India would do well to resist and confront such attempts at coercion and constraint.

(The writer is a research fellow at Max Planck Institute for Comparative Public Law and International Law, Heidelberg, Germany)

Updated Date: Apr 18, 2018 17:03:47 IST