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Treasury Designates Mainland China as a Currency Manipulator

At the direction of President Trump, the U.S. Treasury Department on 5 August designated mainland China as a currency manipulator just over two months after determining in a report to Congress that Beijing met only one of three criteria under the Trade Facilitation and Trade Enforcement Act of 2015 for determining whether a country is pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States. The move took place shortly after the president described the recent drop in value of the mainland Chinese currency “to an almost historic low” as both “currency manipulation” and a “major violation which will greatly weaken China over time”. In a press release announcing the designation, Treasury indicated that it will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by mainland China’s latest actions.

The currency manipulation designation was made under Section 3004 of the Omnibus Trade and Competitiveness Act of 1988, which requires Treasury to annually analyse the exchange rate policies of foreign countries in consultation with the IMF and consider whether countries manipulate their exchange rates for purposes of preventing effective balance of payments adjustments or for gaining an unfair competitive advantage in international trade. If Treasury considers that such manipulation is occurring with respect to countries that have (i) material global current account surpluses and (ii) significant bi-lateral trade surpluses with the United States, the agency can pursue negotiations with such foreign countries on an expedited basis (in the IMF or bi-laterally) for the purpose of ensuring that such countries “regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

Treasury further states that, as described in its most recent report to Congress on the macroeconomic and foreign exchange policies of major U.S. trading partners, mainland China “has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market.” The agency noted recent concrete steps by mainland Chinese authorities to devalue their currency “while maintaining substantial foreign exchange reserves”. Treasury believes that the context in which these actions are taking place and the “implausibility” of mainland China’s market stability rationale confirm that the purpose of the currency devaluation is to gain an unfair competitive advantage in international trade. Treasury also considers mainland China’s pattern of actions a violation of its G20 commitments to refrain from competitive devaluation.

In practical terms, the most relevant impact of the currency manipulation designation should be viewed within the context of a U.S. Department of Commerce proposal that according to U.S. authorities would allow the agency to impose countervailing duties on foreign suppliers with undervalued currencies. While the DOC’s most recent semi-annual regulatory agenda does not provide a target date for the issuance of a final rule, the politically sensitive nature of this matter could place additional pressure on the DOC to finalise the proposal as soon as practically possible.

Issued on 28 May, the DOC proposal would modify two regulations pertaining to the determination of benefit and specificity in CV duty proceedings. If adopted, these modifications would (i) clarify how the DOC determines the existence of a benefit resulting from a subsidy in the form of currency undervaluation and (ii) clarify that companies in the traded goods sector of an economy can constitute a group of enterprises for purposes of determining whether a subsidy is specific.

The proposal identifies the criteria the DOC would use to determine if CV duties should be imposed for currency undervaluation. Specifically, in determining whether a benefit is conferred when a firm exchanges U.S. dollars for the domestic currency of a country under a unified exchange rate system, the DOC would normally consider a benefit to be conferred when the domestic currency of the country is undervalued in relation to the U.S. dollar. In applying this rule, the DOC would request that the Treasury Department provide its evaluation and conclusion as to whether the currency of a country is undervalued as a result of government action on the exchange rate and the extent of any such undervaluation.

While the connotations associated with a currency manipulation designation may also be viewed as a negative factor, any additional potentially adverse impacts derived from such a designation are not evident at this time. The United States will certainly take its case to the IMF but there is little it can do to pressure or punish mainland China on its own accord. If Treasury were to determine that enhanced analysis of mainland China’s macroeconomic and exchange rate policies is required under Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, it could seek enhanced bi-lateral engagement with Beijing to address the alleged currency undervaluation. However, it is hard to see how Treasury could make a case for enhanced analysis when as of two months ago mainland China only met one of three criteria required for such an analysis (i.e., a significant bi-lateral trade surplus with the United States).

Remedial action under the TFTEA could be pursued one year after the commencement of enhanced bi-lateral engagement and could include one or more of the following actions: (i) prohibiting the Overseas Private Investment Corporation from approving any new financing (including any insurance, reinsurance or guarantee) with respect to a project located in mainland China; (ii) prohibiting the federal government from procuring, or entering into any contract for the procurement of, goods or services from mainland China; (iii) instructing the U.S. executive director of the IMF to call for additional rigorous surveillance of the macroeconomic and exchange rate policies of mainland China and, as appropriate, formal consultations on findings of currency manipulation; and (iv) instructing the U.S. trade representative to take into account the extent to which mainland China has failed to adopt appropriate policies to correct the undervaluation and surpluses, in assessing whether to enter into, or to initiate or participate in negotiations to enter into, a bi-lateral or regional trade agreement with mainland China.

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