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China Delisted as Currency Manipulator, Ten Countries Remain Under Scrutiny

Wednesday, January 15, 2020
Sandler, Travis & Rosenberg Trade Report

Just days before the U.S. and China are scheduled to sign a phase one trade agreement, the Treasury Department’s semiannual foreign exchange rate report removed China’s designation as a currency manipulator. The report also named ten countries to a list of those targeted for closer scrutiny.

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.

Currency Manipulation

In August 2019 Treasury designated China as a currency manipulator after Beijing allowed the exchange rate of the yuan to fall to its lowest level in more than a decade, which Treasury argued was intended to “gain an unfair competitive advantage in international trade.” However, Treasury now states that in the phase one trade agreement, which is set to be signed Jan. 15 in Washington, D.C., China “has made enforceable commitments to refrain from competitive devaluation and not target its exchange rate for competitive purposes.”

Treasury has therefore removed the designation of China as a currency manipulator. The report also determined that for the year ending in June 2019 no other major U.S. trading partner met the criteria for that designation either.

If such a determination were made, Treasury would be required to commence enhanced bilateral engagement. If the 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.

Monitoring List

Germany, Italy, Japan, Korea, Malaysia, Singapore, and Vietnam remain on the monitoring list because they met at least two of the three criteria specified by the TFTEA: a bilateral trade surplus with the U.S. of at least $20 billion over a 12-month period, a current account surplus of at least two percent of GDP over a 12-month period, and net purchases of foreign currency conducted repeatedly in at least six out of 12 months that total at least two percent of the country’s GDP. They are joined by Switzerland, which is being reinstated because it again meets two of the criteria.

Ireland now meets only one of the three criteria and will be removed from the monitoring list if that remains the case in the next report. China also meets only one of the criteria but remains on the list because it “accounts for a large and disproportionate share of the overall U.S. trade deficit.”

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