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The US Treasury Department has a warning for the emerging world: The export-your-way-to-prosperity template has fallen out of favour. Once thought to be in US interests—as a way of getting cheap goods—this model of development is now meeting scepticism. The message for Asia should be loud and clear, even if some economies got a pass last week. In its semi-annual assessment of trading partners’ foreign-exchange policies, the US stopped short of labelling Taiwan, Vietnam and Switzerland as currency manipulators, even though they met the criteria. In normal times, they would have been branded with a Scarlet M for holding their currencies down. But officials couldn’t determine whether their practices were done to seek a trade advantage, or simply to buttress markets and alleviate recession. The pandemic skewed capital flows globally, and many countries had to respond. This time, the trio got away with a rap on the knuckles. The softer approach is a shift from the Trump administration, which tagged Hanoi and Bern as manipulators, and admonished a bunch of others, like India, Thailand, Singapore and South Korea.

At its inception in the late 1980s, the Treasury report was mainly seen aimed at Japan. Over time, the focus shifted to China, whose authorities play a big role in managing the nation’s currency. Yet, the guts of last week’s publication expose a world view that stretches beyond Beijing. Since a 2015 law added criteria to be measured, yawning current-account and bilateral trade surpluses have been in the crosshairs as much as the intricacies of foreign-exchange transactions. It’s not enough to simply say country X sold Y dollars worth of its currency over Z months. Officials are also looking at the size of a current-account surplus, and whether it is at least 2% of gross domestic product (GDP). They also examine the bilateral trade surplus. If the gap is at least $20 billion over a 12-month period, that’s a mark against you. Hit three of those, and you’re a manipulator. Check two, and you make the so-called monitoring list. This is how pals like South Korea, India, Germany, Italy, Singapore, Thailand, Malaysia and Japan get put on watch, a kind of purgatory. (China is there.)

The last couple of reports included a review of some errant trading partners’ development history. These examine how these economies wooed manufacturing from abroad and wove themselves into global supply chains, which started winding through Asia in the 1980s. Taiwan was scrutinized in the latest publication, while Vietnam featured in December’s. These briefs could also describe the way Asian economies rose from poverty: attracting foreign direct investment (often thanks to low-cost labour, but also via tax breaks), committing to infrastructure and gaining proximity to big markets. This enticed multinational companies. Because rapidly industrializing Asian countries were so dependent on trade, they loathed high exchange rates. And because the ultimate destination of these goods was store shelves or factories in the US, it was easy for officials and politicians to look the other way. That model has eroded in the political climate.

What price does the US extract in an effort to get currency sinners to change? It’s a bit squishy. The designation, if and when it comes, carries no immediate sanctions. The law requires the Treasury to engage manipulators to address it. Penalties, including exclusion from US government contracts, could be applied after a year, unless the label is removed. It can also be used as a cudgel by other agencies with their own priorities and constituencies. Last year, the US Trade Representative’s office probed the need of remedies for Vietnam’s cheap dong. By doing nothing this time, the US Treasury risks encouraging the behaviour it seeks to change.

Taiwan’s central bank governor Yang Chin-long said that its large trade surplus with the US was due to strong demand for semiconductors, rather than any unfair advantage from currency intervention. “If they want to reduce our trade surplus with them, then we could just stop selling them our chips," he joked, “But they need them!" Yang might be right, but for Taiwan, the strength of US friendship isn’t worth testing. Here, Vietnam’s experience is instructive. It has gone from poster child for the relocation of supply chains from China, to drawing fire from powerful voices in US industry and government over the issue.

Vietnam would be ill-advised to consider itself out of the woods just because Janet Yellen balked. The grey zone matters. If you think everything in the US is about China, the US Treasury’s last two reports suggest otherwise. It goes well beyond daily yuan-trading guidelines. A framework for economic advancement is under the microscope. The test will be once covid disruptions start to abate.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.

©bloomberg

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