The White House has pushed back heavily on today’s multilateral world order. So how will the relationship between the International Monetary Fund and its largest shareholder, the US, evolve under the Trump administration? Stefania Palma reports.

Trump IMF

On his first day in office, US president Donald Trump signed an executive order to withdraw from the Trans-Pacific Partnership (TPP) trade deal. Five months later, the US opted out of the Paris climate agreement.  

The first departure was seen as a blow to multilateralism; the second as a blow to the collective fight against climate change. Both of these values sit at the core of today’s International Monetary Fund (IMF), whose largest shareholder is the US. So how will the relationship between the US and the IMF fare under the Trump administration? 

So far, relations have been surprisingly smooth. But discord could surface in the future. Individuals widely known to be IMF critics are joining the US Treasury as senior staff; there is some political pressure to ease regulation on the US’s biggest banks, which could make the IMF nervous; and the US Congress vote on the next round of the country’s financial commitment to the IMF could be tricky in the current political environment.

Constructive approach

Thus far, the isolationist rhetoric of Mr Trump’s presidential campaign has not dented the White House’s relationship with the IMF. “We have been unusually surprised to the upside,” says Douglas Rediker, who represented the US on the IMF executive board from 2010 to 2012.

In a video interview with The Banker, IMF managing director Christine Lagarde says the relationship with the Trump administration has so far been productive. “I personally took the initiative to visit [US Treasury] secretary Mnuchin, to visit the economic advisers to the president… to get better acquainted, to understand their perspectives, to communicate our policy recommendations and express concerns we had for the global economy, which we believe is of concern to any Treasury secretary,” she says.

David Lipton, first deputy managing director of the IMF, says the smooth relationship with the White House is partly due to the fund’s governance structure, in which the US has a large quota share. “Some of the other [multilateral] institutions are one country, one vote institutions,” he points out.

Mr Mnuchin confirmed this, saying: “As the largest shareholder and, therefore, the country with most at stake, the Treasury seeks a constructive relationship with IMF management and other IMF member countries.”

Other pundits believe the IMF and the US have so far got on well because the individuals dealing with the IMF are in the so-called globalist faction of the White House, as opposed to the more nativist group (which included former chief strategist Steve Bannon).

The US institution leading the relationship with the IMF is the Treasury, and Gary Cohn, director of the National Economic Council, is also involved. “I have known Ms Lagarde for at least 10 years, from back when she was the finance minister of France,” he says. The third institution close to the IMF is the US Federal Reserve. Janet Yellen’s term as Fed chair ends in February 2018, but she is a contender to remain in the post, along with Mr Cohn.

Policy tool 

The smooth relationship between the IMF and the White House can also be attributed to the US wanting to push its own agenda through the fund. “Secretary Mnuchin has asked the IMF to strengthen supervision of currency practices and to work to curtail excessive current account imbalances globally,” says Mr Lipton. 

At a time when the Trump administration feels other parts of the world have not been as strict on its banks as the US has since the 2008 financial crisis, the IMF could also help the White House push foreign regulators, including the Basel Committee on Banking Supervision and the Financial Stability Board, to bring other regions up to US standards, says one senior White House official.

On the geopolitical front, the US should also recognise the value in the IMF’s financial support as a means to ensure global stability. Mr Lipton gives the example of Venezuela, which is in deep political and economic crisis. “If Venezuela got to a point where it wanted to remedy its problems, the US would have a hard time helping them all by itself. The IMF could play a role in terms of advice or money or rallying support from other member countries,” he says.

Improving the IMF

But while the relationship with the IMF has been productive, the Trump administration also believes the fund could be improved. “The IMF should return to its role of encouraging stability among foreign exchange rates, which is accomplished through sound management of public finances, an independent monetary authority operating with transparency, and a market-oriented regulatory framework,” says Mr Mnuchin.  

“There is [also] room for the IMF to be clear and forceful in its surveillance of exchange rates and large trade imbalances, including by giving more prominence and weight to its annual External Sector Report and incorporating more direct language on exchange rates in bilateral surveillance.”

Mr Cohn adds: “When we think about currency and currency valuation, we would like to see the IMF be more vocal about free, fair, transparent and open markets when it comes to the inter-relationship of the dollar and other global trading currencies.”

A US Treasury report published in April 2017 suggests that China is the biggest offender in this space. Foreign exchange intervention has limited renminbi appreciation despite soaring trade and current account surpluses; and at $347bn in 2016, China’s goods trade surplus with the US is by far the largest among any major trading partner, says the report.

In terms of policy recommendations, Mr Mnuchin says the fund should advocate growth-oriented policies to raise real median incomes and promote a fair global economic system. “The IMF should set a good example by imposing budget discipline and cost-containment measures on itself, including the compensation of IMF management and staff,” he says.

Sceptics incoming

So far, the IMF has largely dealt with Mr Mnuchin at the Treasury, given that no other senior nominee had been confirmed by the Senate. The White House still has not announced a nominee for Treasury deputy secretary and confirmation of Adam Lerrick in the role of deputy under secretary for international finance was still pending as The Banker went to press. But on August 3, David Malpass was confirmed as under secretary for international affairs. 

Mr Malpass and Mr Lerrick are seen as critics of the IMF. In 2001, Mr Malpass wrote an article for the Wall Street Journal criticising the IMF for using US taxpayers’ money for programmes focused on currency weakness and high tax rates that did not generate growth. “The result is [countries] more deeply impoverished than [they] would have been without IMF involvement,” he wrote. Meanwhile, in a 1999 paper, Mr Lerrick called for the IMF to rely more on capital markets and less on taxpayers’ money for funding. 

However, some pundits argue Mr Malpass’s and Mr Lerrick’s opinions of the IMF may well have changed since the early 2000s. “The IMF has changed enormously. We are not our grandfathers’ IMF,” says Ms Lagarde. “We certainly welcome these formerly sceptic[al] individuals and I would be delighted to take them through what we do, what we can do, and how much we have changed.”

What is more, Mr Malpass or Mr Lerrick would find it hard to influence policy direction in today’s top-down White House. “Decisions are generally taken at Principals meetings. There are not yet a sufficient number of political sub-cabinet officials for decisions to be made at those levels or for issues to bubble up in a systematic manner,” says an administration official.

Mr Rediker comments: “Once the secretary and the [Treasury] career staff have established a pathway, it is harder for new nominees to do a 180 on policy.”

Edwin Truman, non-resident senior fellow at the Peterson Institute for International Economics, has a slightly different view. “Personalities do matter. [However,] to the extent that Malpass and Lerrick have historically been sceptical about the fund, in their [Treasury] roles the IMF is now a tool [to further US policy,]” he says.

Points of difference

In this top-down White House, however, some pundits fear a change of heart on multilaterals from Mr Trump himself could sour relations with the IMF, a fear exacerbated by the unpredictability of today’s administration. “This is not an administration with a blueprint for every issue. Certain policies are not as well established, at least at the outset,” says the administration official.

Stronger protectionist rhetoric in the Trump administration would be a further risk, according to Ms Lagarde. “Nature does not like a vacuum, and wherever you leave a vacuum, somebody is going to fill it,” she says. “US leadership has consistently been critically important and needs to be continued, not only in its own interest, but also in the interest of the global community.” Mr Trump’s withdrawal from the TPP was seen as giving China – which had been excluded from the trade agreement – the opportunity to build up its influence in Asia-Pacific.

A second area where the IMF needs “to remain very attentive” is trade, says Ms Lagarde. “I think we pursue the same objectives [as the US] but we need to all be very attentive to the form [this] takes, the policies it implies, and how broad the gains will be as a result,” she adds.

Financial regulation 

A third point of potential friction between the IMF and the US is financial regulation. A US Treasury paper published in June 2017 calls for looser regulation for small US banks that cater to the real economy. “I think [Ms Lagarde] would agree that the pendulum probably swung too far after the 2008 crisis and we may have over-regulated parts of the system, especially the small and medium-sized banks,” says Mr Cohn. “This administration is very committed to go towards a tiered, more modernised regulatory environment.”

But the Treasury report also called for changing the frequency and severity of the Fed’s stress testing on big US banks and eliminating the ‘gold-plating’ of international capital and liquidity standards for large lenders. In an interview with the Financial Times, Stanley Fischer, vice-chairman of the Fed’s board of governors, dismissed calls to ease stress testing and defined pressure to loosen standards on big banks as “very, very dangerous”. 

Ms Lagarde broadly welcomes the US Treasury paper, but cautions: “We will remain very attentive that proposed changes going forward do not weaken the financial regulation that strengthens the system and reinforces capital requirements, liquidity ratios and the resolution mechanism.”

The Trump administration is keen to revisit US financial regulation to create a level playing field worldwide. “We have gone through the pain and agony of regulating, recapitalising and deleveraging our banks. That is something that the rest of the world has not done,” says Mr Cohn. According to one senior White House official, Europe generally, and Germany in particular, stand out for trailing behind the US.

Emerging markets

Further points of friction between the IMF and the US could arise at the next IMF quota reform in 2019 or when updating the new arrangements to borrow (NAB) – a set of credit arrangements between the IMF and 38 members that is used to supplement the fund’s quota resources – in 2022.

IMF quotas determine a member’s maximum financial commitment to the fund, how much a country can borrow from it and its voting power. With a quota of SDR82.99bn ($116.94bn), the US accounts for 16.52% of IMF votes. That is above the 15% threshold, which gives the US power of veto in the IMF.

Some feared the Trump administration’s ‘America first’ strategy could translate into a drop in the US quota. But Mr Mnuchin says: “We do not contemplate reducing the US quota at the IMF. It is important for the US to maintain a very strong leadership role in promoting global growth.”

Nathan Sheets, former under secretary for international affairs at the Treasury during Barack Obama’s second term, adds: “No administration wants to go down in history as the one that lost IMF veto power.” 

What is more, a drop in the US quota is unlikely at a time when emerging markets’ IMF voting power is on the rise: Brazil, China, India, and Russia are now among the 10 largest shareholders. China’s quota jumped from 3.81% to 6.09% after the last reform. But its voting power remains small for the world’s second largest economy, suggesting Beijing will continue pressuring the IMF for better representation.

For her part, Ms Lagarde wants the fund to be more representative of emerging market members. “We need to continue [improving the representation of emerging market economies]. It is a required process under the governance rules of the IMF,” she says. She even suggests the IMF might one day be headquartered in Beijing, given that it is intended to be based in the largest economy in the world.

Quota questions 

Crucially, no IMF quota reform can be passed without US approval because the reform needs an 85% majority and the US accounts for 16.52% of IMF votes. So would the US approve a reform giving more voting power to developing markets such as China? Mr Mnuchin says the administration has not made a decision on the need for a change to IMF quotas or voting power yet. “At present, the IMF has ample, or perhaps even excess, financial capacity,” he says.

The decision, however, does not lie solely with him. The US Congress needs to vote on the IMF quota reform any time the US looks to increase its share. In principle, if a deal involved no change in the US nominal quota, it would not need congressional approval. But this is unlikely because quota reforms have always involved growth in overall quotas: members do not want a reduction in their nominal quotas as a result of rebalancing shares and voting power. If US nominal quotas were fixed and overall quotas increased, the US voting share would decline, threatening its power of veto.

Passing reforms in Congress that give more US resources to the IMF is difficult because of historical resistance to it on Capitol Hill. Some Republicans associate it with notions of nation-building and foreign aid, which are not popular on the right, while some liberal Democrats see the IMF as an austerity vehicle.

Progress in Congress

It took five years (2010-15) for the last quota reform to be passed, and that was during the Obama administration, which was far more supportive of a multilateral world order than Mr Trump. Opposition from Republican congressmen slowed the process.

Passing an IMF quota reform in today’s Congress would be a “heavy lift,” says Mr Truman. “The Democrats were largely in favour in 2010, but they won’t help Trump. They will do to Trump what Republicans did to Obama.” 

But the slow progress of the 2010 quota reform was as much about partisanship as it was about scepticism about whether using US taxpayers’ money to finance the IMF was efficient and in line with US interests, a notion the Trump administration is particularly sensitive about. “We are in a very tight fiscal environment and my instinct is it is going to remain tight. It is really an issue of fiscal allocation,” says Mr Sheets. And with the Trump administration pushing for tax cuts that would slash government revenue by $7000bn, the issue of fiscal allocation is likely to remain fraught.

In 2022, Congress will also need to vote on renewing a US commitment of SDR28.2bn to the IMF’s NAB, which is renewed every five years. Although this is after the end of Mr Trump’s term, the groundwork for the vote starts during the current administration. “If we don’t [approve it] and we withdraw from the [NAB], it would be a major issue. [Although] it wouldn’t cripple the fund financially, the signal [of the] US’s role would be very large and negative,” says Mr Truman.

The possibility of a turnover in White House staff makes it hard to predict how the US will handle the next IMF quota reform and NAB update. By then, Mr Cohn might be the new chair of the Fed, or the Treasury might have a new secretary. It is not unusual for there to be at least two different secretaries during the course of a single presidential term.

So the relationship between the IMF and the Trump administration has so far been more amicable than expected, at least partly because the US sees the IMF as a tool to push its own agenda of levelling the playing field in global trade, foreign exchange markets and financial regulation. The litmus test of this relationship will be if other IMF members push back on US pressure on the fund, and when the time comes for US Congress to vote on the next IMF quota reform and NAB update. While the alliance so far has been constructive, a number of hurdles lie ahead. After all, not even a year has passed since Mr Trump set foot in the White House.  

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