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 Now that the US formally has withdrawn from TPP negotiations, many are unsure of the status of this initiative.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 Thornton 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.