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Treasury Finds No Currency Manipulation but Places Six Countries on Monitoring List

Wednesday, October 19, 2016
Sandler, Travis & Rosenberg Trade Report

The Treasury Department has added Switzerland to a monitoring list that already included China, Japan, Korea, Taiwan, and Germany in its second enhanced report on foreign exchange policies. The report again concludes, however, that no major U.S. trading partner is manipulating the value of its currency for a trade advantage.

The Trade Facilitation and Trade Enforcement Act signed into law earlier this year establishes a process to determine whether an economy may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the U.S., engage economies 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 bilateral trade surplus with the U.S. (which Treasury has set at greater than $20 billion) and a material current account surplus (i.e., larger than three percent of that economy’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 more than two percent of its GDP over the year).

Treasury has determined that China, Japan, Korea, Taiwan, Germany, and Switzerland each met two of these criteria. Once added, an economy will remain on the list for at least two consecutive reports to help ensure that any improvements in performance are durable and not due to temporary one-off factors.

China – has a significant bilateral trade surplus with the U.S., but its current account surplus has fallen below the established threshold and its intervention in the foreign exchange market was aimed at preventing a rapid depreciation of the yuan that would have had negative consequences for the Chinese and global economies (though the report calls for more transparency over exchange rate management and goals and strong adherence to G-20 commitments to refrain from competitive devaluation)

Japan – has a significant bilateral trade surplus with the U.S. and its current account surplus for the last four quarters through June 2016 reached the highest level since 2011 (3.7 percent), but has not intervened in the foreign exchange market in nearly five years notwithstanding the appreciation of the yen in the last year

Korea – has a significant bilateral trade surplus with the U.S. and a current account surplus well above the material threshold, but over the 12 months ending June 2016 authorities intervened to resist depreciation of the won (which the IMF considers to be undervalued) in a shift from several years of asymmetric intervention to resist appreciation

Taiwan – has a current account surplus well above the material threshold and engaged in persistent net foreign currency purchases in the 12 months through June 2016, thus limiting currency appreciation that would generally reduce Taiwan’s very large and growing current account surplus, but its trade surplus with the U.S. was below the threshold

Germany – has a significant bilateral trade surplus with the U.S. and a current account surplus well above the material threshold (and the largest in the world in nominal dollar terms), but the European Central Bank has not intervened in foreign currency markets since 2011

Switzerland (added to this report because trade with U.S. is sufficiently large for it to be considered a major trading partner) – has a current account surplus well above the material threshold and has engaged in significant foreign currency purchases over the last year, but its trade surplus with the U.S. was below the threshold

Treasury has determined that no major U.S. trading partner currently meets the standard of manipulating the rate of exchange between its currency and the U.S. dollar for purposes of gaining unfair competitive advantage in international trade. If such a determination were made, Treasury would be required to commence enhanced bilateral engagement with that country. If that country 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 the Office of the U.S. Trade Representative 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.

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