Critical Questions

No Currency Manipulators in Biden’s First FX Report

April 16, 2021

On April 16, the U.S. Treasury Department issued its semiannual Report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, the first release during the Biden administration and under Secretary Yellen. In this latest “FX report,” Treasury declined to designate any country for currency “manipulation,” reversing its December 2020 designation of Switzerland and Vietnam. However, it concluded that Switzerland and Vietnam, as well as Taiwan, met three criteria to trigger “enhanced engagement” to “address underlying causes” of currency undervaluation and external imbalances.

Q1: What is the FX report and how does it determine “manipulation”?

A1: Responding to concerns that foreign countries “manipulate” their currency at the expense of the United States, Congress in 1988 directed the Treasury Department to provide semiannual reports on the foreign exchange policies of major U.S. trading partners. Treasury has typically used the report as leverage in negotiations to address harmful practices, threatening to “name and shame” trading partners. The FX report also analyzes broader macroeconomic trends and global imbalances.

Treasury can designate countries using two sets of criteria: a subjective assessment or a three-part quantitative test. Under the Omnibus Trade and Competitiveness Act of 1988, Treasury must consider “whether countries manipulate the rate of exchange between their currencies and the U.S. dollar for purposes of preventing effective balance of payments adjustments or of gaining unfair competitive advantage in international trade.” (Emphasis added.) This relatively subjective assessment gave Treasury considerable discretion in designating countries, which it used sparingly, preferring to address concerns through negotiations.

Frustrated that Treasury did not designate China, Congress introduced a three-part quantitative test for enhanced analysis of country external positions and practices in the Trade Facilitation and Trade Enforcement Act of 2015. That legislation requires Treasury to evaluate major U.S. trading partners using three metrics: (1) bilateral trade balance with the United States, (2) current account surplus, and (3) intervention in the foreign exchange market. Under this framework, Treasury is required to engage economies that exceed certain thresholds for all three criteria and “impose penalties on economies that fail to adopt appropriate policies.” Major trading partners that exceed two of the thresholds are placed on a “Monitoring List,” though China is currently on the list for breaching only one. Initially, the thresholds were a bilateral (goods) trade surplus with the United States of at least $20 billion, a current account surplus of at least 3 percent of gross domestic product (GDP), and net foreign currency purchases equivalent to at least 2 percent of an economy’s GDP over a 12-month period.

Until the Trump administration, the last economy Treasury designated a currency manipulator was China in 1994. Determined to take a more aggressive approach, the Trump administration lowered the current account surplus threshold from 3 percent of GDP to 2 percent. This increased the number of economies analyzed in the FX report from 13 in the fall 2018 report to 21 in the spring 2019 report. In August 2019, the Treasury Department designated China before dropping the label in its subsequent report, released after Beijing had agreed to the currency chapters of the January 2020 phase one trade deal. In its final FX report, issued in late December 2020, the Trump administration designated Switzerland and Vietnam currency manipulators.

Q2: What’s new in the April 2021 FX report?

A2: Although Treasury found that Switzerland, Taiwan, and Vietnam each exceeded the quantitative thresholds of the 2015 act, it determined there was “insufficient evidence” to conclude that any of three “manipulates their respective exchange rates for either of the purposes referenced in the 1988 Act.” This reverses Treasury’s December 2020 decision to designate Switzerland and Vietnam. Notably, the report states, “as the global economy continues to stabilize, it is critical that key economies adopt policies that allow for a narrowing of excessive surpluses and deficits.” This indicates that Treasury took a flexible approach to reflect the distortions caused by the pandemic, but that it may be less forgiving in the fall report if macroeconomic conditions stabilize.

Ten major trading partners—Japan, Korea, Germany, Ireland, Italy, India, Malaysia, Singapore, Thailand, and Mexico—met two of the three criteria for enhanced analysis in the fall report, placing them on the Monitoring List. Both Ireland and Mexico were newly added to the list, the latter for the first time. Citing China’s “disproportionate share of the overall U.S. trade deficit,” Treasury kept it on the Monitoring List, even though it exceeded the threshold for only one of the three criteria, its bilateral trade surplus with the United States. The report also admonished China for providing “limited transparency regarding key features of its exchange rate mechanism” and urged Beijing to address the issue.

Q3: Has the Biden administration taken a different approach from its predecessor?

A3: Despite reporting that Treasury might raise the current account threshold, it decided to retain the threshold at 2 percent of GDP, maintaining the Trump administration’s policy. As a result, Treasury reviewed and assessed the policies of 20 major U.S. trading partners, the same number as the December 2020 report. Further, the latest FX report focuses predominately on trading partners in Asia, continuing a trend during the Trump administration (and reflecting rising intervention in the region). In the December 2020 report, 9 of the 12 economies designated as currency manipulators or on the Monitoring List were in Asia; in the latest report, 9 of 14 are in the region.

As mentioned above, the Yellen Treasury reversed the Trump administration’s decision to designate Switzerland and Vietnam, recognizing that distortions caused by the Covid-19 economic shock have complicated the situation.

Q4: What comes next?

A4: In the short term, Treasury will continue engaging with Switzerland and Vietnam to address imbalances and undervaluation and will begin similar discussions with Taiwan. The results of those negotiations will inform whether Treasury decides to designate any of the three in its fall FX report.

Previously, designation carried little immediate penalties aside from increased negotiations with Treasury to address harmful intervention. However, the Trump administration controversially threatened to associate a designation with Commerce Department and Office of the U.S. Trade Representative analysis of currency undervaluation as a justification for broad retaliatory tariffs, including through a Section 301 investigation into Vietnam’s currency practices. The Biden administration has toned down tariff threats on Vietnam, but continues to raise concerns with Hanoi on its foreign exchange practices. The FX report indicates that ceasefire will continue. Instead of designating Vietnam, the report emphasized that Treasury will continue its “ongoing enhanced engagement” with Hanoi to address underlying causes of its currency undervaluation.

Despite the recognition that Taiwan exceeds the three thresholds under the 2015 act, it is unlikely that Washington will take aggressive enforcement action given the political and strategic importance of the island economy. Instead, Treasury will “commence enhanced bilateral engagement” with Taipei to resolve persistent concerns of structural undervaluation.

Finally, China’s avoidance of a designation does not signal a softening of policy. Instead, it suggests the Biden administration sees issues other than currency as highly problematic and will use other economic tools to address concerns with Beijing, such as the recent addition of seven Chinese supercomputing entities to the Department of Commerce’s entity list restricting exports of U.S.-origin items.

Matthew P. Goodman is senior vice president for economics at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Dylan Gerstel is a research associate with the CSIS Economics Program.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). 

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