US Treasury Report Sets Up "Monitoring List" of Five Major Trading Partners

4 May 2016

Five of the US’ top trading partners have now been put on a “monitoring list,” according to a recent report by the US Treasury Department on exchange rate policies. However, these countries fell short of meeting the necessary criteria for “enhanced analysis” under Washington’s new trade enforcement laws.

The 29 April report specifically flagged China, Japan, Korea, Taiwan, and Germany for this “monitoring list,” claiming that these five countries all meet two out of the three criteria specified under US law for additional analysis.

The framework setting these criteria was provided by the Trade Facilitation and Trade Enforcement Act of 2015, which was signed into law earlier this year. The legislation had been one of a suite of trade-related bills put forward in 2015, with the others all becoming law last year. (See Bridges Weekly, 25 February 2016)

The new US law requires, among other things, that the Department of the Treasury report to Congress every six months on the macroeconomic and currency exchange rate policies of top trading partners. This builds on the existing reporting requirement in earlier US legislation, specifically the Omnibus Trade and Competitiveness Act of 1988.

Monitoring list criteria

The criteria outlined under Washington’s new trade enforcement legislation specifically involves having a significant bilateral trade surplus with the US; a material current account surplus; and ongoing “one-sided intervention” in the foreign exchange market.

Specifically, a significant bilateral trade surplus is defined by the report as being over US$20 billion, while a material account surplus is defined as being larger than three percent of that economy’s gross domestic product (GDP).

The definition that Treasury has used for “persistent, one-sided intervention” would require that a country have conducted multiple net purchases of foreign currency over the past year which add up to over two percent of that same country’s GDP.

“While no economy met all three of the criteria, this result is a reflection, in part, of the dynamics of the global economy during the past year, in which capital outflows from emerging markets have led a number of economies to engage in foreign exchange intervention to resist further depreciation of their currency (rather than appreciation),” the report explained.

Furthermore, it noted, “the extent of these flows was unusually high by historical standards, which underscores the possibility that more economies may trigger these thresholds going forward.”

Should any country meet all three criteria, Treasury would be required under US law to begin “enhanced bilateral engagement” with that economy. Should the trading partner involved not put in place “appropriate policies to correct its undervaluation and external surpluses” within one year, this would then require a response from the US’ executive branch.

This response could take at least one of the following forms. For example, Washington could stop access to development financing under the Overseas Private Investment Corporation (OPIC) or bar that country from US public procurement. Other options include requesting the International Monetary Fund to undertake increased surveillance of that economy, or requiring US trade negotiators “to take into account” the decision to not make such policy changes when determine whether to get involved in trade negotiations with that country.

Furthermore, under the 1988 law Treasury is also required to determine “whether countries manipulate the rate of exchange 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.”

None of the countries examined met this standard either, the report said.

Five countries in focus

While the research conducted for this report examined data taken over 15 years across several economies, the publication focuses in particular on these five countries’ policies. These are assessed over the second half of 2015 and first quarter of 2016.

China had a significant bilateral trade surplus with the US and a material current account surplus, according to Treasury. Beijing has also “supported” the renminbi, the report claims, while noting the context of such a move – specifically, following the August changes to the country’s exchange rate policy, which led to a sharp devaluation that roiled markets.

“Such a depreciation would have had negative consequences for the Chinese and global economies,” the report cautions, calling for Beijing to give additional clarity over the objectives of its policies in this area, and assurances that devaluation will not be used as a form of growth stimulus.

Chinese currency policies have long been an area of scrutiny for both the US and other partners, as the Asian economic giant continues to enact reforms to these policies and others. However, last year China made headlines after the International Monetary Fund deemed the renminbi to no longer be “undervalued.” (See Bridges Weekly, 28 May 2015)

Later in the year, the US Treasury Department revised its stance on China’s currency, stating that it “remains below its appropriate medium-term valuation” – a change from earlier descriptions of it being “significantly undervalued.” (See Bridges Weekly, 22 October 2015)

Korea also had both a significant bilateral trade surplus and material current account surplus with the US. Additionally, Korea allegedly intervened in the foreign exchange market to prevent depreciation of its currency, with the US government agency calling for appreciation of the “won” and suggesting that Seoul only intervene in its currency in cases of “disorderly market conditions.”

While meeting the same two criteria as China and Korea, the report notes that Japan has not intervened in foreign exchange markets in recent years. Germany is in a similar situation with its bilateral trade surplus and material current account surplus, which “accounted for the bulk of the euro area’s surplus.” Like Japan, though, the European Central Bank has not intervened in foreign exchange markets since 2011.

Taiwan has a material current account surplus and has intervened in foreign exchange markets throughout the past year. The report highlights that this development as “concerning,” while acknowledging that Taiwan has an insignificant bilateral trade surplus with the US at less than US$15 billion.

ICTSD reporting, “US Chides Five Economic Powers Over Policies,” THE WALL STREET JOURNAL, 30 April 2016.

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