At 5pm on Friday, the US Treasury released its anticipated semiannual “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States”, i.e., the “who manipulates their currency” report.
Some had expected that either China, Germany and/or South Korea would be named but in the end, not a single country was deemed a currency manipulator, although India was added to the watch list which included China, Japan, Switzerland, Korea, and Germany.
Still, despite the lack of new determinations – which may (or may not) ease trade tensions with China somewhat – there was the usual harsh language, especially when it comes to Beijing, with the report warning that “the increasingly non-market direction of China’s economic development poses growing risks to its major trading partners and the long-term global growth outlook.”
There was one notable change: the report added that the U.S. Treasury “is strongly concerned” about China’s trade imbalance, a change in wording vs past report when it said it “remains concerned”, an apparent escalation if not an actual declaration of currency war.
China’s goods trade surplus with the United States amounted to $375 billion in 2017, by far the largest of any major trading partner of the United States. Treasury is strongly concerned by the lack of progress by China in correcting the bilateral trade imbalance and urges China to create a more level and reciprocal playing field for American workers and firms. Further opening of the Chinese economy to U.S. goods and services, as well as reducing the role of state intervention and allowing a greater role for market forces, would provide more opportunities for American firms and workers to compete in Chinese markets and facilitate a reduction in the bilateral trade imbalance. These adjustments should be paired with macroeconomic reforms that support greater consumption growth in China.
Separately, on Japan, the Treasury said yen intervention should be limited to exceptional cases and with prior consultation. The weakest criticism was reserved for South Korea, whose Korean won the Treasury said was “not notably strong” vs past few decades.
Germany wasn’t spared either with the report noting that “the combination of lower oil prices and German economic policies supporting high domestic saving and low consumption and investment has led to a rapid increase in Germany’s current account surplus, which is now the largest nominal surplus in the world at $299 billion over the four quarters through December 2017. Over the long run, there has been a meaningful divergence between German domestic inflation and wage growth and (faster) average euro area inflation and wage growth. This has contributed to a general rise in Germany’s competitiveness vis-à-vis its euro area neighbors. However, given the wide dispersion of economic performance across the euro area, the euro’s nominal exchange rate has not tracked this rise in German competitiveness. Consistent with this, the IMF estimates that Germany’s external position remains substantially stronger than implied by economic fundamentals (whereas the euro area as a whole is assessed by the IMF to have an external position broadly in line with economic fundamentals).”
Finally, on the topic of the new entrant to the watch list, India, the report said:
Notwithstanding the pick-up in intervention, the rupee appreciated 6.4 percent against the dollar over 2017, while the real effective exchange rate also continued its general uptrend from the last few years, appreciating by 3.1 percent. In its most recent analysis, the IMF maintained its assessment that the rupee is moderately overvalued. The RBI’s most recent annual report assessed the rupee to be “closely aligned to its fair value over the long term.”
Full report below (pdf link)
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