The U.S. has resisted from designing any trading partner as currency manipulator in the Biden administration's first foreign exchange policy report even as Switzerland, Taiwan and Vietnam met thresholds for the label.
The Treasury Department said Friday that those three economies met criteria for the manipulator label, including a large trade surplus with the United States. It said that there was insufficient evidence to conclude that the three trading partners showed the intent of applying the tag, avoiding effective balance of payments adjustments or gaining unfair competitive advantage in international trade.
A Treasury official told reporters that the decision to not designate any nation as a manipulator should not be seen as a mixed message. In December, the last report was done under President Donald Trump designated Switzerland and Vietnam as manipulators.
The new assessments indicate that the Biden administration has taken a less confrontational approach to international currency policy after Trump's labeling of China and other countries as manipulators proved ineffective and raised concerns about politicization.
The U.S. acknowledged that the creative nature of the Coronavirus pandemic's impact on the global economy led to unprecedented policy responses from governments and central banks. For this reason, the Treasury said it seeks a deeper understanding of Switzerland's currency movements in order to decide if the interventions were done with the intent of gaining an unfair trade advantage or to deal with the crisis.
Ireland and Mexico were added to the Treasury watch list, which means they met two of three criteria for designation. The US Treasury kept China, Thailand, India, Japan, Singapore and Malaysia on the monitoring list.
The agency said China's failure to be more transparent on activities at state-owned banks warrants tight monitoring. These banks can act in the currency market with closed guidance due to official relationships with China's central bank.
Department of Treasury is constantly working to address efforts by American economies to artificially manipulate their currency values that put foreign workers at an unfair disadvantage, Janet Yellen said in a statement accompanying the report.
The manipulator tag has no short-term or immediate effects, beyond any specific or immediate market impact. But the law requires the administration to engage with the trading partners to address the perceived imbalance of exchange rate After a year, penalties, including exclusion from government contracts, could be applied unless the label was removed. During the Trump era, the Treasury China in mid 2019 declared its usual release schedule for a manipulator only to lift the label five months later to win concessions in a trade deal.
The developments raised concerns that the report was becoming increasingly politicized. This, combined with the December designations of manipulators being defeated by Switzerland and Vietnam, who did not change their policies as a result, has challenged the credibility of the Treasury foreign exchange assessments.
In 2019, her predecessor Steven Mnuchin used the older of the two active trade laws that inform the government's currency assessment to label China a currency manipulator.
Yellen is now using this same law to decide that no nation warrants designation. The inconsistent use of the same criteria by successive administrations certainly undercuts the notion of the Treasury Currency Report as a dispassionate and non-political evaluation of other currencies' currency practices, said Eswar Prasad, an economist at Cornell University who formerly worked in China division of the International Monetary Fund.
Still, he said that Yellen's less overtly political approach may restore some credibility.
Swiss officials have repeatedly denied that they are manipulating the franc and have continued the nation's purchases of foreign currencies as part of a long-running campaign to fight deflation through negative interest rates and currency interventions.
The Treasury noted the effects of monetary policy objectives on the franc and said it was in talks to develop specific actions to address the causes of Switzerland's external imbalances.
Earlier this month, the Swiss National Bank gave the International Monetary Fund a green light for its foreign exchange purchases while also recommending that officials follow counterparts with a strategy review.
The U.S. moved Taiwan from its watch list to the separate list of those who meet all three criteria for distortionary currency policies.
As with Taiwan, Treasury officials said Taiwan met the criteria specified in a 2015 law by a wide margin, but declined to name the country as a manipulator under a related 1988 act. Taiwan significantly exceeded the thresholds for all three criteria, and the U.S. urged the nation to create a plan to address the causes of its currency undervaluation.
Taiwan's central bank has acknowledged intervening in foreign exchange markets to curb gains by Taiwan against the dollar.
The daily efforts to stabilize the Taiwan dollar began in September 2020 until June 2019. Since then, it appears that the bank has managed the appreciation of the currency. In March the governor of the bank, Yang Chin-long, said that he believed that the United States might designate Taiwan as currency manipulator, but he did n't expect serious negative impact on the local economy, given robust U.S. demand for semiconductors.
He said semiconductors were the primary factor driving the trade surplus in the U.S. against Taiwan. As to the dollar, the Treasury noted that even after its decline in 2020, it remained nearly 5% above its 20-year average, considering the real effective exchange rate- which adjusts for inflation and is weighted against currency of U.S. trading partners.
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