Currency manipulator

Currency manipulator is a designation applied by United States government authorities, such as the United States Department of the Treasury, to countries that engage in what is called “unfair currency practices” that give them a trade advantage. Such practices may be currency intervention or monetary policy in which a central bank buys or sells foreign currency in exchange for domestic currency, generally with the intention of influencing the exchange rate and commercial policy. Policymakers may have different reasons for currency intervention, such as controlling inflation, maintaining international competitiveness, or financial stability. In many cases, the central bank weakens its own currency to subsidize exports and raise the price of imports, sometimes by as much as 30-40%, and it is thereby a method of protectionism.[1] Currency manipulation is not necessarily easy to identify and some people have considered quantitative easing to be a form of currency manipulation.[2]

Under the 1988 Omnibus Foreign Trade and Competitiveness Act, the United States Secretary of the Treasury is required to "analyze on an annual basis the exchange rate policies of foreign countries … and consider whether countries manipulate the exchange rate between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade" and that "If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments".[3]

A designated currency manipulator can be excluded from U.S. government procurement contracts.[4]

According to the Trade Facilitation and Trade Enforcement Act of 2015, the Secretary of the Treasury must publish a semi-annual report in which the developments in international economic and exchange rate policies are reviewed. If a country is labeled a currency manipulator under this Act, "The President, through Treasury, shall take specified remedial action against any such countries that fail to adopt policies to correct the undervaluation of their currency and trade surplus with the United States."[5][6]

It has been argued that the concept of "currency manipulation" is hypocritical, given that the US already has the privilege of having the main reserve currency of the world, which is needed for international trade. Besides, massive interventions of the Federal Reserve since the financial crisis of 2008, such as Quantitative Easing and interventions in the REPO market, could very easily be interpreted as currency cheating.

Designations under the 1988 Act

Since the 1988 Act was enacted, the U.S. has designated the following countries as currency manipulators: South Korea in 1988, Taiwan in 1988 and again in 1992, and China from 1992 until 1994. India was added to the list in 2017 for ‘questionable foreign exchange policies’. It had stated that India had increased its purchases of foreign exchange over the last three quarters of 2017, although the rupee still rose in value. India's net purchases of foreign exchange in 2017 as a whole totalled $56 billion (2.2% of GDP).[7] In May 2019, the United States Department of the Treasury removed India and Switzerland from its currency monitoring list but China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam remained on the list.[8] India was removed from the list after it met one of the three criteria necessary for inclusion on the monitoring list, namely, a significant bilateral surplus with the US. India also reduced its level of foreign exchange reserves, to 0.2% of GDP.[9] An analysis by The Economist in 2017 noted that Switzerland has been manipulating its currency more than China since 2009 and Taiwan and South Korea have been doing so since 2014.[10]

In August 2019, under personal pressure from President Donald Trump, as part of the China–United States trade war, the United States Treasury again designated China a currency manipulator,[4][11][12] a designation not supported by the International Monetary Fund.[13] The designation against China was withdrawn in January 2020 after China agreed to refrain from devaluing its currency to make its own goods cheaper for foreign buyers.[14] The two countries are soon to sign a "Phase 1 U.S.-China trade agreement" that includes a provision that prevents China from manipulating its currency to gain trade advantages.[15]

In December 2020, the Trump administration labelled Switzerland and Vietnam currency manipulators and added India, Thailand and Taiwan to the Monitoring List. China, Japan, Korea, Germany, Italy, Singapore and Malaysia continue to be on the list.[16][17]

Evaluation Criteria in December 2020[18]

Country	Bilateral Trade	Current Account	FX Intervention	Currency manipulator	Monitoring List.
	Goods Surplus (billion USD) ≧ 20 billion USD	Balance (% of GDP) ≧ 2%	Net Purchases (% of GDP) ≧ 2%
China	310	1.1	-0.1		Yes
Germany	62	6.8	-		Yes
Vietnam	58	4.6	5.1	Yes
Japan	57	3.1	0		Yes
Switzerland	49	8.8	14.2	Yes
Italy	30	3.0	-		Yes
Malaysia	29	2.5	1.1		Yes
Taiwan	25	10.9	1.7		Yes
Thailand	22	6.3	1.8		Yes
India	22	0.4	2.4		Yes
Korea	20	3.5	-0.6		Yes
Singapore	-1	16.1	21.3		Yes

Impact on manufacturing

Currency manipulation has a disproportionate effect on the secondary sector of the economy and lobbyists of the U.S. manufacturing sector have regularly referred to China as a currency manipulator. A 2013 analysis by Carlos D. Ramirez found that "an increase of one percentage point in the share of congressional district labour force in manufacturing is associated with a 19.6% increase in the likelihood that the district legislator will label China a currency manipulator".[19]

Reactions

In 2020, the COVID-19 pandemic has exacerbated U.S. trade deficits with a number of nations, including Switzerland and Vietnam. While the Swiss National Bank will continue to practice currency interventions to stop the influx of foreign money during economic crisis, the State Bank of Vietnam said that its foreign exchange rate policy "is a way to contain inflation, ensure macro stability and not to create an unfair trade advantage". A senior U.S. treasury official said the US aimed “to resolve our issues” with Vietnam and Switzerland within a year. He added that the Biden administration had not been briefed on the issue, and that "they are not implicated in this." Robin Winkler, a currency strategist at Deutsche Bank, claimed the Biden administration would be less likely to impose economic sanctions than its predecessor.[20][21]

References

1. Bergsten, C. Fred (February 25, 2015). "Currency Manipulation: Why Something Must Be Done". Forbes.
2. JOHNSTON, MATTHEW (June 25, 2019). "Quantitative Easing vs. Currency Manipulation". Investopedia.
3. "OMNIBUS TRADE AND COMPETITIVENESS ACT OF 1988 (H.R. 3) : SEC. 3004. INTERNATIONAL NEGOTIATIONS ON EXCHANGE RATE AND ECONOMIC POLICIES" (PDF). United States Department of the Treasury.
4. Shalal, Andrea; Lawder, David; Wroughton, Lesley; Brice, Makini (August 5, 2019). "U.S. designates China as currency manipulator for first time in decades". Reuters.
5. "H.R.644 - Trade Facilitation and Trade Enforcement Act of 2015. 114th Congress (2015-2016), VII, Sec. 701". Congress.gov. February 24, 2016.
6. "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States". United States Department of the Treasury.
7. India removed from ‘currency manipulation’ monitoring list
8. "US removes India from its currency monitoring list; China, Japan stay". Business Standard. Press Trust of India. May 29, 2019.
9. US removes India, Switzerland from its currency monitoring list
10. "China and currency manipulation: Champs or chumps". The Economist. March 2, 2017.
11. "Treasury Designates China as a Currency Manipulator" (Press release). United States Department of the Treasury. August 5, 2019.
12. "Trump pressured Mnuchin to label China 'currency manipulator', a move he had previously resisted". Washington Post.
13. Palmer, Doug. "New IMF report doesn't back Trump's currency manipulation charge against China". POLITICO.
14. US reverses China 'currency manipulator' label
15. US drops designation of China as currency manipulator
16. Trump fires parting shot as US labels Switzerland, Vietnam as currency manipulators
17. "Treasury Releases Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States". US Department of the Treasury. December 16, 2020.
18. "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States" (PDF). US Department of the Treasury. December 2020.
19. Ramirez, Carlos D. (December 2013). "The political economy of "currency manipulation" bashing". China Economic Review. 27: 227–237. CiteSeerX 10.1.1.408.3085. doi:10.1016/j.chieco.2012.10.005.
20. Politi, James; Szalay, Eva (December 16, 2020)."US declares Switzerland and Vietnam currency manipulators". ft.com.
21. "US Treasury lists Switzerland and Vietnam as forex manipulators."thegreaterindia.com. Retrieved 17 December, 2020.