The New York Times reported late last week that the Treasury Department put Taiwan, Vietnam and Switzerland on notice over their currency practices -- but struck a more conciliatory tone than the previous administration and stopped short of actually labeling any of them as manipulators.
The announcement came in the Treasury's first foreign exchange report under Secretary Janet Yellen. Treasury reports to Congress twice yearly in an effort to hold the U.S. trading partners accountable if they try to gain an unfair advantage in international commerce through currency manipulation.
The U.S. requires "manipulators" to enter into negotiations with the U.S. and the International Monetary Fund to address the situation. The blemish is somewhat symbolic but can lead to tariffs or other retaliation if talks collapse.
Both Switzerland and Vietnam were listed as "manipulators" last year and their removal on Friday means no country currently faces that designation. Still, Treasury said there were signs that Switzerland, Vietnam and Taiwan engaged in “improper practices,”
"Treasury is working to address efforts by foreign economies to artificially manipulate their currency values that put American workers at an unfair disadvantage," Secretary Yellen said.
Last week's decision is the latest attempt by the administration to deescalate tension with U.S. allies after four years of former President Donald Trump's confrontational approach to international economic diplomacy. It also steers the United States away from "the Trump fixation" on bilateral trade imbalances, taking "a more holistic view of trade relationships," the Times said.
Treasury officials noted the extraordinary economic conditions brought on by the pandemic in the last year and said they were not trying to send mixed messages by suggesting manipulation was taking place but not labeling it as such.
"This report adopts a more measured and analytical tone in evaluating U.S. trading partners' currency practices relative to the previous administration's approach of wielding the report as a political tool," said Eswar Prasad, the International Monetary Fund's former China chief. He said the Biden administration's report "comes to analytically balanced assessments of foreign exchange market intervention by U.S. trading partners."
The Trump administration labeled Vietnam and Switzerland as manipulators in its final report in 2020, but the Biden administration said it found "insufficient evidence" to support the designation now. To receive the label, Treasury must conclude that a country manipulates the exchange rate between its currency and the dollar for "purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."
Treasury instead said it would continue "enhanced engagement" with Vietnam and Switzerland and begin similar talks with Taiwan, which includes urging the trading partners to address undervaluation of their currencies. There is no fixed duration for how long such talks can go without a resolution.
Mark Sobel, the chairman of the Official Monetary and Financial Institutions Forum, said the Biden administration was wise to take a more nuanced approach. He noted that Switzerland faced unusual monetary policy and safe-haven challenges and that Vietnam's foreign exchange reserves had been low when it received the manipulator label last year. A government can suppress the value of its currency by selling it in foreign exchange markets and stockpiling dollars.
Moreover, Taiwan, Thailand and South Korea have traditionally been even worse offenders than Switzerland and Vietnam, according to Sobel, although the United States has avoided calling them out for it.
"I think the new Treasury team is more willing to recognize that the relative policy divergence between the U.S. and others is a significant factor in that," Sobel said. "I also think the Trump administration approach was much more belligerent as a general proposition."
Taiwan was the 10th-largest U.S. trading partner in 2019, according to the Office of the United States Trade Representative. Vietnam was the 13th largest and Switzerland the 16th.
While the United States has been deepening ties with Taiwan as part of its effort to confront China, the Biden administration is also calling for a major investment in America's semiconductor industry to reduce the nation's reliance on imports from Taiwan and other countries.
The Treasury report said that Taiwan's central bank "continues to actively intervene in the foreign exchange market" and that "less formal exchange rate management practices" had prevented the Taiwanese dollar from fully reflecting macroeconomic fundamentals.
Currency analysts say they have been expecting the Biden administration to put more pressure on Taiwan to change its foreign exchange practices for some time. The Council on Foreign Relations reported in 2019 that Taiwan was hiding $130 billion in reserves to mask its currency interventions and that the case for naming it a manipulator was stronger than the case for naming China.
The Treasury Department did not label China a currency manipulator either, instead urging it to improve transparency over its foreign exchange practices. Treasury kept China, Japan, South Korea, Germany, Italy, India, Malaysia, Singapore and Thailand on its currency monitoring list, and added Ireland and Mexico.
So, we will see. Currency manipulation is difficult to prove especially as volatile economic forces cause fluctuations in many situations. Still, relationships among currencies are extremely important and should be watched closely by government officials and investors alike as markets evolve, Washington Insider believes.