U.S. Places Five Countries on New Exchange Rate Monitoring List
The Treasury Department has placed China, Japan, Korea, Taiwan and Germany on a new monitoring list in its first enhanced report on the foreign exchange policies of major U.S. trading partners. 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), a material current account surplus (i.e., larger than three percent of that economy’s gross domestic product) and 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 and Germany each met two of these criteria and will therefore closely monitor and assess their economic trends and foreign exchange policies.
China – has a significant trade surplus with the U.S. and a material current account surplus and has intervened heavily in the foreign exchange markets in recent months after strong downward market pressure triggered by a surprise change in China’s foreign exchange policy last August
Japan – has a significant trade surplus with the U.S. and a material current account surplus but has not intervened in the foreign exchange market in more than four years
Korea – has a significant trade surplus with the U.S. and a material current account surplus and during the second half of 2015 through March 2016 appears to have intervened to resist currency depreciation during periods of financial market turbulence
Taiwan – has a material current account surplus and appears to have engaged in persistent net foreign currency purchases through most of 2015
Germany – has a significant trade surplus with the U.S. and a material current account surplus that is currently the second largest in the world, representing substantial excess saving that could, at least in part, be used to support domestic demand
Treasury has determined that no economy currently meets all three criteria. 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.