Treasury Department Issues Semiannual Report on Foreign Exchange Policies

On April 29, the U.S. Department of the Treasury released its latest report on the foreign exchange policies of major trading partners of the United States. The report is submitted to Congress semiannually, but this is the first time it has been issued since Congress established new criteria for determining whether a country is unfairly manipulating its currency. These provisions were included in the Trade Facilitation and Trade Enforcement Act of 2015 (popularly known as the Customs Bill) in order to provide new reporting and monitoring tools and to establish new measures for addressing unfair currency practices.

Although the report concludes that no major trading partner currently meets the standard of manipulating exchanges rates for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage, the Treasury Department says it will more closely monitor five countries – China, Germany, Japan, South Korea and Taiwan – due to policies contributing large trade and current account surpluses. The full report is available online and a summary of its key findings is available in this Treasury Department news release.

In an interesting analysis of the Treasury Department report, the Peterson Institute for International Economics states that the new criteria established in the 2015 Customs Bill is an improvement over previous legislation governing this topic, which dated back to 1988. While Peterson Institute supports the main conclusions reached in the Treasury Department report, it takes issue with some of the methodology used, including:

  • The definition of “major U.S. trading partners” is too restrictive and therefore excludes countries such as Hong Kong, Malaysia, Thailand and Vietnam.
  • The “allowable” level of intervention is too generous, especially for countries such as China and Japan that already hold very large levels of reserves.likk
  • When establishing criteria for unfair currency manipulation, Congress should not have focused only on countries that have a bilateral trade surplus with the United States, because this fails to take into account the complicated nature of modern trade flows.

The full text of Peterson Institute’s analysis is available online.