Boeing Not The Solution To Tame East Asia’s Soaring Surpluses

There was a time in the pre-pandemic era, when East Asia’s dynamic economies had a reliable playbook whenever the U.S. Treasury complained about their soaring trade surpluses and currency under-valuation against the dollar—buy lots of Boeing commercial aircraft. As the U.S. Treasury steps up surveillance of East Asian surpluses and currency valuations, buying Boeing is no longer a credible option given the perilous financial situation of many airlines in the region. As economic conditions begin to recover, the question is whether the Biden administration is prepared to provide some forbearance.

The early signs are somewhat promising. “Treasury is working tirelessly to address efforts by foreign economies to artificially manipulate their currency values that put American workers at an unfair disadvantage,” Janet Yellen said on April 16 after the release of the U.S. Treasury’s semiannual report on macroeconomic and foreign exchange policies of America’s major trading partners. In particular, the report identified Switzerland, Vietnam, and Taiwan as meeting criteria set under U.S. legislation to determine whether or not a country was intervening in currency markets to artificially undervalue its currency to gain an unfair trade advantage. However, in what appears to be a diplomatic compromise, the report noted that there was “insufficient evidence” to make a finding that Switzerland, Vietnam, and Taiwan were manipulating their exchange rate. To keep the pressure, the Biden administration will now engage in “enhanced engagement” with the three countries and in good measure also placed 11 other countries on its “monitoring list.” They include trading heavyweights like China, Germany, Japan, Korea, Ireland, Italy, India, Singapore, Malaysia, Thailand and Mexico.

The next report will be published in the fall and reading the tea leaves in D.C. gives one the sense that Treasury will continue to fudge the issue. The question is why focus on alleged currency manipulators when you are unenthusiastic to take policy action? Even on China, where there is widespread consensus in D.C. about the renminbi’s undervaluation, which has been contradicted by the IMF in its own analysis of China’s real effective exchange rate (REER), Treasury simply “urged” Beijing to improve transparency. The release of the Treasury report makes sense in the domestic context – with the administration keen to protect its political flanks by not providing an opening for Republicans to complain about going soft on China.

What reasonable policy options does the U.S. Treasury have in ensuring that the Swiss franc, Vietnam dong, New Taiwan dollar and currencies of major trading partner are not misaligned or undervalued? The previous administration’s preferred approach was imposing trade and financial sanctions, a blunt instrument which inflamed relations and had a questionable impact. The Biden administration has indicated that it prefers pursuing a diplomatic solution by sitting down with trading partners and exploring policy solutions to reduce burgeoning trade surpluses and in boosting currency valuations against the dollar.

There are several hurdles to this approach. First, many countries are still recovering from the economic impact of the pandemic and have limited fiscal and monetary space. Second, “buy America” provisions imposed by the Biden administration to boost job numbers and investment at home will make it difficult for America’s trading partners to commit to buying more or investing in the country. Finally, a bilateral one-size-fits-all solution may not work for all countries and a multilateral approach under the G20 (where all countries commit to reducing trade surpluses, for example) has a better chance of success. As for Boeing, which was sitting on a record order book from Asia prior to the pandemic, the aircraft maker will be hoping that the region’s airlines will press the buy button before the next Treasury report is published later in the year.