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China Currency Significantly Undervalued, Greater Intervention by Korea, Report Finds

Monday, April 13, 2015
Sandler, Travis & Rosenberg Trade Report

In its semiannual report on foreign exchange rate policies released April 9, the Treasury Department again determined that none of the United States’ major trading partners is manipulating its exchange rate to gain an unfair trade advantage. However, the report’s findings with respect to China and Korea could provide ammunition for U.S. lawmakers seeking to include provisions to address currency manipulation in a trade promotion authority bill that could be introduced by the end of the month.

The report praises China for “real progress,” noting that the real effective exchange rate of the renminbi appreciated meaningfully over the past six months and that China has reduced the level of its intervention in the foreign exchange market. Nevertheless, Treasury asserts that the RMB exchange rate “remains significantly undervalued” and that “China should allow the market to play a greater role in determining the exchange rate.”

Beijing has been accused of deliberately keeping the value of the RMB low in recent years to boost its exports, which play a major role in the country’s economic growth. These accusations have been at the core of arguments among some economists and members of Congress that the U.S. should take more formal action to prevent or remedy currency manipulation in the future. One such effort currently underway seeks to include specific negotiating objectives concerning this issue in the forthcoming TPA bill. While this idea has garnered support from a number of legislators, the Obama administration has objected to it.

While those seeking to bolster protections against currency manipulation have largely focused on China given the size of its economy and its trade surplus with the U.S., more recently they have raised concerns about the practices of other major U.S. trading partners in an effort to strengthen their argument. They may find additional support in the Treasury report, which states that over the past six months Korean authorities “appear to have substantially increased intervention” to resist the appreciation of the won. On the other hand, the report finds that Japan has not intervened in foreign exchange markets in more than three years.

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