In a little noticed countervailing duty case involving Vietnamese tyres, the US Treasury may have set off tremors for the international monetary system, concluding for the first time that currency undervaluation potentially warrants a Commerce Department subsidy finding.
Given the administration pushed a rule to allow currency undervaluation CVDs, rejecting views held under Presidents George W. Bush and Barack Obama, Treasury’s decision is hardly surprising.
Its action raises nettlesome questions on three counts – the model, Vietnam’s circumstances, and international financial considerations. I have repeatedly raised concerns about the Treasury/Commerce action.
Model results reflect a range of assumptions. There is no precise way to measure undervaluation multilaterally and especially bilaterally. Treasury’s model, drawing on the International Monetary Fund’s external balance approach, reflects sophistication and merits praise.
But despite the model’s publication, transparency could be enhanced significantly. The model is multilaterally consistent. Since global current accounts in principle must add up to zero, one country’s norm impacts others. Current account norms are impacted by numerous variables – demographics, institutions and policies, among others (see chart below). In the IMF’s EBA, the US norm is pulled down 2% of GDP by the dollar’s reserve status. If the US norm were not impacted as much by the reserve variable, surplus nations’ norms could not be as large, making undervaluation findings more feasible.