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No Currency Manipulation Found but More Countries Under Scrutiny

Friday, May 31, 2019
Sandler, Travis & Rosenberg Trade Report

The Treasury Department’s semiannual foreign exchange rate report does not list any U.S. trading partner as a currency manipulator but revises the way such countries are evaluated and names nine to a list of those targeted for closer scrutiny, up from six previously.

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 U.S., 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 bilateral trade surplus with the U.S. and a material current account surplus and has engaged in persistent one-sided intervention in the foreign exchange market.

Review Changes

Beginning with this report Treasury is making a number of changes to the thresholds used to evaluate these criteria.

- all U.S. trading partners whose bilateral goods trade with the U.S. exceeds $40 billion annually (currently 21 countries) will be assessed, not just the 12 largest trading partners

- a significant bilateral trade surplus remains defined as $20 billion (goods trade only)

- a material current account surplus is now two percent of the country’s gross domestic product rather than three percent

- persistent intervention is now defined as net purchases of foreign currency in six (rather than eight) of the past twelve months that total at least two percent of GDP over a 12-month period

Monitoring List

China, Japan, Germany, and Korea are again placed on the monitoring list and are joined by new additions Ireland, Italy, Malaysia, Singapore, and Vietnam. Other than China and Korea, each of these countries met at least two of the three criteria during the most recent period. Korea only met one criterion and will be removed from the monitoring list in the next report if such remains the case during the current six-month period.

China also met only one of the criteria but remains on the list because its currency has fallen against the dollar by eight percent over the last year and it has an “extremely large and widening” trade surplus with the U.S. Treasury notes that from now on it will add and retain on the monitoring list any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if it has not met two of the three listing criteria.

India and Switzerland have been removed from the monitoring list because they each have met only one of the three criteria for two consecutive reports.

Currency Manipulation

Treasury has also determined that during the second half of 2018 no major U.S. trading partner met the standard of manipulating the rate of exchange between its currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or 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 could waive the remedial action requirement under specified circumstances.

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