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Treasury Finds No Currency Manipulation in Most Recent Report

The U.S. Treasury Department’s semi-annual foreign exchange rate report does not list any U.S. trading partner as a currency manipulator although Treasury expanded the list of trading partners targeted for close scrutiny of their currency practices from six to nine. Mainland China met only one of the criteria but remains on the list because it accounted for “an extremely large, persistent, and growing bilateral trade surplus with the United States.”

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 two 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 made certain methodological changes in its most recent report. For example, instead of considering only the 12 largest U.S. trading partners the agency expanded its assessment to cover the policies of any country with which the United States has bi-lateral goods trade in excess of US$40 billion. Moreover, the material current account surplus threshold was lowered from at least three percent of GDP to at least two percent of GDP, and the threshold for measuring persistence of net foreign exchange purchases was modified from eight of 12 months to six of 12 months (the threshold for net foreign exchange purchases as a share of GDP was kept at two percent or more).

Based on these expanded criteria, Treasury considered the currency and economic policies of 21 trading partners and nine – mainland China, Germany, Ireland, Italy, Japan, South Korea, Malaysia, Singapore and Vietnam – were included in the monitoring list. On the other hand, India and Switzerland were removed from the list.

Inclusion in the monitoring list entails close attention by the United States to the country’s currency practices and macroeconomic policies but does not carry the potential for sanctions associated with being named a currency manipulator. While candidate Trump vowed during the campaign trail to name mainland China a currency manipulator as soon as he took office, Treasury has not yet designated any economy as manipulating its currency in accordance with TFTEA and Omnibus Trade and Competitiveness Act of 1988 criteria. Senate Minority Leader Chuck Schumer (Democrat-New York) complained following the issuance of the foreign exchange rate report that “this is the fifth time in a row that the Trump administration has refused to label China a currency manipulator.”

Treasury continues to have significant concerns about mainland China’s currency practices, particularly in light of the alleged misalignment and undervaluation of the RMB relative to the U.S. dollar. According to the agency, Beijing should make a concerted effort to enhance transparency of its exchange rate and reserve management operations and goals.

Treasury indicates that it will continue its enhanced bi-lateral engagement with mainland China regarding exchange rate issues, given that the RMB has fallen against the U.S. dollar by eight percent over the last year in the context of an extremely large and widening bi-lateral trade surplus. Treasury continues to urge mainland China to take the necessary steps to avoid a persistently weak currency, including by aggressively addressing market-distorting forces (including subsidies and state-owned enterprises), enhancing social safety nets to support greater household consumption growth, and rebalancing the economy away from investment.

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