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Treasury Again Finds Mainland Chinese Currency Is Not Being Manipulated

According to the U.S. Treasury Department’s latest semi-annual report to Congress on international economic and exchange rate policies released on 13 April, neither mainland China nor any other major U.S. trading partner meets the requirements to be designated as a currency manipulator. Treasury also added India to the monitoring list and has raised the possibility of expanding the number of economies that may be reviewed in the future in order to further advance the Trump administration’s efforts to achieve fairer and more reciprocal trade as well as stronger, more balanced global growth.

The Trade Facilitation and Trade Enforcement Act established a process to determine whether a country may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States, engage countries that may be pursuing such policies and impose penalties on those that fail to adopt appropriate policies. The TFTEA requires Treasury to undertake an enhanced analysis of exchange rates and externally-oriented policies for each major trading partner that has a significant bi-lateral trade surplus with the United States (which Treasury has set at greater than US$20 billion) and a material current account surplus (i.e., at least three percent of the country’s gross domestic product) and has engaged in persistent one-sided intervention in the foreign exchange market (i.e., conducted repeated net purchases of foreign currency that amount to at least two percent of its GDP over the year).

Treasury has determined that for the most recent period Japan, South Korea, Germany, Switzerland and India each met two of these three criteria. India was added this year because it has a significant bi-lateral goods trade surplus with the United States and increased its purchases of foreign exchange in 2017. Mainland China met only one of the criteria but accounted for “a large and disproportionate share” of the overall U.S. trade deficit. These six economies will remain on Treasury’s monitoring list but no enhanced analysis will be undertaken.

In addition, Treasury has determined that during the second half of 2017 no major U.S. trading partner met the standard of manipulating the rate of exchange between its currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If such a determination were made, Treasury would be required to commence enhanced bi-lateral engagement with that economy. If that economy failed to adopt appropriate policies to correct its undervaluation and external surpluses within a year, the president would be required to take one or more of the following actions: (1) denying access to Overseas Private Investment Corporation financing, (2) excluding the country from U.S. government procurement, (3) calling for heightened surveillance by the International Monetary Fund, and (4) instructing USTR to take such failure into account in assessing whether to enter into a trade agreement or initiate or participate in trade agreement negotiations. The president may waive the remedial action requirement under specified circumstances.

Treasury highlights in its report the “extremely large and persistent” bi-lateral trade surplus that mainland China maintains with the United States, by far the largest among any of the United States’ major trading partners. Specifically, mainland China’s goods trade surplus with the United States stood at US$375 billion over the four quarters through December 2017, an increase of US$28 billion over 2016. In contrast, the report notes, mainland China runs trade deficits with many other economies and, as such, has a smaller overall trade and current account surplus.

Treasury is “strongly concerned” by the lack of progress by mainland China in correcting this imbalance and continues to urge Beijing to create a more level and reciprocal playing field for U.S. workers and firms. The report states that further opening the mainland Chinese economy to U.S. goods and services, as well as reducing the role of state intervention and allowing a greater role for market forces, would provide more opportunities for U.S. firms and workers to compete in the mainland and facilitate a reduction in the bi-lateral trade imbalance. Treasury adds that these adjustments should be paired with macroeconomic reforms that support greater consumption growth in the mainland. Treasury also places significant importance on mainland China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target its exchange rate for competitive purposes, as well as on greater transparency of mainland China’s exchange rate and reserve management operations and goals.

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