Treasury Dept. Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States

January 14, 2020

China had been designated as a “currency manipulator” last August, but that label is being rescinded on the eve of the Phase One U.S.-Sino trade pact. In theory, retaliatory actions can be more speedily imposed by the President on so-called currency manipulators, but the switch in designation in reality will make little practical difference.

In a wide-ranging and previously delayed semi-annual report that was due in November, the Treasury Department of the United States nevertheless kept China on its “Monitoring List,” a group that also includes Japan, South Korea, Germany, Italy, Ireland, Switzerland, Singapore, Malaysia, and Vietnam. The report makes gratuitous recommendations to the governments of these economies on what policies they need to pursue to reduce their external surpluses but offers no self-examination regarding what the Trump Administration is prepared to do to lower America’s excess of investment over savings, which is the root factor behind the U.S. current account deficit.

Below are some excerpts from the Treasury Report.

America is in finer shape than other economies:

Growth has held up well in the United States, but has decelerated in many other major economies as a diverse range of challenges weigh on global activity. These include political uncertainty in many European and Latin American countries, financial turbulence in some large emerging markets, China’s efforts to address corporate debt vulnerabilities, and ongoing geopolitical tensions.

Comments on and Advice for China:

China has made enforceable commitments to refrain from competitive devaluation and not target its exchange rate for competitive purposes. China has also agreed to publish relevant information related to exchange rates and external balances. Meanwhile, after depreciating as far as 7.18 RMB per U.S. dollar in early September, the RMB subsequently appreciated in October and is currently trading at about 6.93 RMB per dollar. In this context, Treasury has determined that China should no longer be designated as a currency manipulator at this time.

China needs to take additional policy measures to stimulate domestic demand and reduce the Chinese economy’s reliance on investment and exports.

The report acknowledges that direct currency market intervention has been lightened by many countries, but Treasury officials note that the dollar has been naturally firm in recent years. Other governments should be just as willing to stay out of the market when their currencies are appreciating.

Treasury will continue to monitor closely the extent to which intervention by our trading partners is symmetrical, and whether economies that choose to smooth exchange rate movements resist depreciation pressure in the same manner as appreciation pressure.

China is not the only country which ought to have a more stimulative fiscal policy and structural reforms to unleash private domestic demand.

Many countries, particularly Germany, the Netherlands, and Korea, have sufficient fiscal space for substantial pro-growth stimulus, which could help reduce the pressure for further monetary accommodation. Subdued real interest rates across the global economy are a symptom of substantial excess saving that is not being productively employed within the domestic economies of Germany, the Netherlands, China, and other major economies. In order to achieve stronger and more balanced global growth, key economies that have maintained large and persistent external surpluses must pursue reforms that will revitalize domestically driven growth, create productive opportunities for investment, and spark private sector-led growth.

There’s some specific advice for Japan, South Korea, and Singapore:

Japan should build upon its recent economic momentum to enact bolder structural reforms to strengthen domestic demand, support innovation and create a more sustainable growth path over the long term, which would help reduce Japan’s public debt burden and trade imbalances.

Fiscal policy should be used proactively to support both near-term activity and medium-term output. The South Korean authorities should limit currency intervention to only exceptional circumstances of disorderly market conditions.

Singapore should undertake reforms that will lower its high saving rate and boost low domestic consumption, while striving to ensure that its real exchange rate is in line with economic fundamentals, in order to help narrow its large and persistent external surpluses.

A misperception persists that ECB policy ought to be tailored for Germany’s economic conditions. “The European Central Bank (ECB) has not intervened unilaterally in foreign currency markets since 2001.” But Germany shares an “undervalued real effective exchange rate.”

And there is additional advice for the Merkel government. The need is “urgent”

for Germany to cut elevated labor and value-added taxes, restore stronger purchasing power to German households, and undertake reforms to unleash robust domestic investment and consumption. This would help underpin domestically driven growth and reduce large external imbalances.

France has a current account deficit and is thus not an object of the Treasury report, but Euroland’s third largest economy made the hit list:

Italy needs to undertake fundamental structural reforms to raise long-term growth — consistent with reducing high unemployment and public debt — and safeguard fiscal and external sustainability.

Switzerland had been given a pass but not this time:

Switzerland continues to have a very large current account surplus, which stood at 10.7 percent of GDP over the four quarters through June 2019. To help narrow its large and persistent trade and current account surpluses, Switzerland should adjust macroeconomic policies—in particular, using its ample fiscal space to more forcefully support domestic economic activity and reduce reliance on monetary policy as it approaches its limits. Treasury continues to encourage the Swiss authorities to publish all intervention data on a higher frequency basis.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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