Central bank Governor Perng Fai-nan (彭淮南) on Thursday said that a global trade war would have no winners, as all nations, including the US, depend on the free flow of goods and services to drive their economy. Speaking at the legislature’s Finance Committee, Perng also said that Taiwan should pay attention to avoid getting trampled if “two elephants start fighting,” referring to a potential trade war between the US and China.
While Perng did not explain what tactics US President Donald Trump could use as he signals a trade war against China and how serious Beijing’s retaliation would be, his comments came as the new US administration has threatened to impose import taxes and vowed to attack what it says are unfair trade practices, while questioning the WTO’s dispute settlement procedures.
In an interview with Reuters late last month, Trump called Chinese the “grand champions” of currency manipulation, a remark that has raised eyebrows in financial markets.
Although Beijing controls the pace at which the yuan can rise and fall, the US has yet to officially label China a currency manipulator — with a looming semi-annual report scheduled for release by the US Department of the Treasury next month.
Meanwhile in Taiwan, the fear of being labeled a currency manipulator by the Trump administration has caused the central bank to refrain from intervening in the foreign-exchange market, local media reported earlier this week.
The US government included Taiwan, along with China, Japan, Germany, Switzerland and South Korea, in a foreign-exchange “monitoring list” in October last year, citing Taiwan’s high current-account surplus and practices of market intervention to limit the New Taiwan dollar’s appreciation.
The NT dollar has appreciated by about 5 percent against the US dollar since the beginning of this year, making it the second-best performer among Asian currencies, after the South Korean won. Perng last week used this data to show that the central bank does not manipulate Taiwan’s currency.
However, the question is how long the central bank can continue its hands-off stance and if the NT dollar can afford to appreciate further without harming the nation’s export competitiveness. Would the NT dollar’s rise lose steam due to an outflow of hot money if the US Federal Reserve raises interest rates later this month? Can the NT dollar’s appreciation be sustained until next month’s currency report?
Although Perng told the committee he is confident that Taiwan would be dropped from the US’ “monitoring list,” what would happen if it were to remain?
The currency issue is not an easy task for the central bank to solve. More importantly, other government agencies should also come forward with contributions — either supply-side or demand-side measures — to revitalize the economy, while allowing the central bank greater leeway to manage the currency issue in a flexible and effective way.
A global trade war, with retaliatory measures taken by all participants, would assure mutual destruction and could drag the world economy into a depression, a situation that cannot be taken lightly. In Taiwan’s export-oriented economy, its weakness is that it relies heavily on exports to a few markets and concentrates on a few industries. If Taiwan can diversify its overseas markets, it would likely help it withstand the effects of a possible trade war.
However, in the near term, policymakers should prepare themselves in case Trump decides to label Taiwan a currency manipulator.
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