As the ink dries on Donald Trump's renegotiated U.S.-South Korea trade pact, the White House is racing to declare victory. The purported win: a clause banning currency-market meddling.
Sorry to break the news, President Trump, but Asia is way ahead of you in holding back from intervention. In 2017, remember, the Bank of Korea stood back as the won rallied 13% against the dollar. And Seoul is not alone. Chinese and Indian officials tolerated 6% gains by the yuan and rupee, and the Bank of Japan barely murmured as the yen surged 7% since Trump's inauguration 14 months ago. In fact, the only major economy to manipulate exchange rates since then is Trump's.
Why the restraint in Asia? A sense of futility in the face of the U.S. president's commitment to a weak currency. On the campaign trail, Trump complained the dollar is "too strong" and "it is killing us." Then, on Jan. 25, Treasury Secretary Steven Mnuchin made it official: The 23-year-old strong-dollar preference is dead.
But the weak-dollar president should beware: Asia may be the real winner of his beggar-thy-neighbor ploy. After the 1997 Asian financial crisis, the region saw a collective race-to-the-bottom on exchange rates. The biggest push came right from the top -- from Japan, Asia's most developed economy and historical growth model. In 2004 alone, Tokyo spent the then-equivalent of Indonesia's gross domestic product trying to drive down the yen. A decade later, a 30% yen devaluation was the cornerstone of Prime Minister Shinzo Abe's reflation plan.
Students of Japan's development model -- officials from Bangkok to Seoul -- were just as liberal with currency-intervention efforts. What Asia has been less liberal about, though, is questioning where all this obsessing over currencies had gotten it.
Synchronized corporate welfare on such an epic scale enabled complacency. It took the onus off exporters to innovate, entire industries to restructure and government officials to do the heavy lifting on increasing competitiveness. That, in a nutshell, explains the limited success of Abenomics. A weak yen reduced the urgency to increase productivity, streamline operations and invent game-changing products the way Japan did in the 1980s.
Tokyo's currency welfare did nothing to make labor markets more flexible, curb bureaucracy, narrow the gender-pay gap, enliven entrepreneurship, increase risk-taking or boost productivity. It barely even fattened paychecks. The slow pace of supply-side upgrades, it turns out, left Japan Inc. reluctant to share profits with workers.
A similar tension confronts South Korean President Moon Jae-in. In May 2017, he inherited an economy dominated by a handful of family-owned giants. For generations, a succession of presidents supported these national champions -- names like Samsung, Hyundai and Lotte. Not surprisingly, these exporting giants were glacial about adapting to an increasingly dynamic global marketplace. Why bother, when the government coddles you with cheap won? Trump's weak dollar alters that calculus. Korea's pampered export giants, for example, are being pulled out of their comfort zones. These so-called chaebols will be forced to restructure underperforming units and boost the ratio of profits from services and home-grown inventions. Moon can hasten the shakeup by adopting Seoul's own strong-currency policy, leaving no doubt a new era of self-responsibility has arrived.
Moon also should put the full force of his government into turning Korea's much-ballyhooed "Industry 4.0" aspirations into reality. Japan, too, has buzzed about following Angela Merkel's lead in Germany in using new technology and the digitization of production to move upmarket. Here, Germany's success as a high-labor-cost center that thrived for decades despite exchange rate swings and growing global competition is a wise point of measurement. Its strategy: Adapt, innovate and restructure accordingly.
Germany Inc. does this using a three-step approach: aggressive investments in research and development, championing small-to-midsize companies -- its so-called Mittelstand -- and very close relationships with regional trading partners. Forged during the time of the ultra-strong deutsch mark, the model has certainly benefited from the mark's underpricing when the eurozone was created. But without first adopting the right approach, Germany would never have weathered the euro's successive crises so well.
Trump's America is taking aim at Beijing's answer to Industry 4.0, President Xi Jinping's "Made in China 2025" scheme. After slapping tariffs on "old economy" steel and aluminum, the White House is mulling moves against 10 strategic industries China hopes to corner. Targets could include intellectual-property rights, high-end machinery, biotechnology, aerospace and new-energy vehicles.
"These are things that if China dominates the world, it's bad for America," U.S. Trade Representative Robert Lighthizer told Congress last month.
Odd, then, that Trump would pursue a currency paradigm that encourages Asia to build muscle at America's expense. And to do so in a craven way that dents Washington's soft power.
The optics of Washington's protectionist turn are bad indeed. Particularly when one considers how little exchange rates have to do with America's troubles. Trade wars will not boost U.S. wages or labor efficiency. They have little bearing on widening inequality, crumbling infrastructure or surging health care costs. They will not prepare U.S. workers for automation, robots, artificial intelligence and other job-killing advances the Trump White House ignores.
Trump's overriding goal is to reanimate the economy that existed in 1985, one anchored by a model of globalization long ago replaced. Using exchange rates to return there could prove dangerous. In December, Trump's Republican Party passed a $1.5 trillion tax giveaway the economy did not need, putting the U.S. on a perilous debt trajectory. If the dollar's drop were to take on a life of its own, global markets would be collateral damage. One flashpoint: Asians own more than $3 trillion of U.S. Treasuries, threatening governments with significant fiscal losses.
Given that trajectory, it seems futile indeed for Asia to stick with the weak-currency imperative of the last 20 years. Yet there are more pros than cons as Trump codifies manipulation bans into trade deals, starting with South Korea.
Rising exchange rates, after all, denote collective confidence in Asia. That seal of market approval pulls in foreign capital, helping governments strengthen national balance sheets, keeping bond yields low and buoying stock values. It also forces Asian governments and companies to adapt and innovate while the "America First" president does his worst. Trumping the dollar could make Asia's animal spirits again.
William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.