Yellen Treasury looks the other way on currency manipulation

April 23, 2021 2:15 PM
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PIIE/Jeremey Tripp

Despite Secretary Janet Yellen's promise to take a hard line against currency manipulation, the US Treasury Department declined to name any country a currency manipulator in its latest report on April 16. As noted in a previous post, currency manipulation jumped dramatically to nearly $450 billion in 2020, and Treasury's own criteria point to at least three manipulators last year: Switzerland, Taiwan, and Vietnam. Nevertheless, Treasury declared that it had "insufficient evidence" to judge whether large-scale currency purchases by these countries were intended to support their excessive trade surpluses. What other purpose could there be?

When countries have more than adequate levels of foreign exchange reserves, the only purpose of acquiring further reserves is to hold down the exchange value of the domestic currency. The reason to do that is to maintain competitive prices for one's exports and prevent a flood of imports. For countries that already have an excessive trade surplus, such behavior constitutes currency manipulation. The US current account deficit widened by $166 billion in 2020; a significant fraction of that widening is likely attributable to the increase in foreign currency manipulation last year.

At her confirmation hearing in January 2021, Secretary Yellen said, "the intentional targeting of exchange rates to gain commercial advantage is unacceptable," and that she would "oppose any and all attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade."1

Treasury has established three criteria for gauging whether large-scale official currency purchases should be considered currency manipulation: persistent net official purchases of foreign currency (more than 2 percent of GDP), a material trade (current account) surplus (more than 2 percent of GDP), and a significant bilateral trade surplus with the United States (more than $20 billion per year). A previous post discussed concerns with Treasury's criteria, most notably the requirement that a country have a large bilateral trade surplus with the United States. This requirement has no economic justification and grants a free pass to Singapore, which was the most active manipulator in 2020 on the more economically sound criteria proposed by Bergsten and Gagnon in 2017.

Switzerland and Taiwan met the Bergsten and Gagnon criteria in 2020 (see this post), and they have been some of the largest and most frequent manipulators in past years. Vietnam does not meet two of the Bergsten and Gagnon criteria: First, it is a lower-middle-income country according to the World Bank, whereas Bergsten and Gagnon focus only on upper-income and upper-middle-income countries. Second, it has relatively low foreign exchange reserves net of external public debt.

Two countries identified by the Bergsten and Gagnon criteria—Korea and Thailand—met two of Treasury's three criteria: a material current account surplus and a significant bilateral trade surplus. They did not meet the foreign exchange intervention criterion, apparently because Treasury takes a restrictive view of what constitutes intervention. Treasury ignores foreign currencies purchased by sovereign wealth funds, even though these purchases affect currency markets in the same way as foreign exchange reserves. To avoid being labeled a manipulator, all a country has to do is set up a sovereign wealth fund and use it to make excessive currency purchases, as Korea has done. Treasury also focuses only on market purchases of foreign currencies, whereas Bergsten and Gagnon use net official acquisitions of foreign currencies, which includes interest and dividends on existing holdings but not valuation changes. Countries with excessive stocks of foreign assets should be spending out of the earnings and not letting them pile up indefinitely. For Thailand, interest and dividends appear to have pushed net acquisitions of foreign exchange reserves above 2 percent of GDP, whereas outright purchases were below 2 percent of GDP in 2020.

Other countries identified by the Bergsten and Gagnon criteria in 2020—Guatemala, Hong Kong, and Israel—are not in the top 20 US trading partners, to which Treasury limits its focus, perhaps justifiably. Guatemala met the criteria by the smallest of margins, and it has not manipulated in prior years, suggesting that it should be excused. Hong Kong and Israel, however, have been frequent manipulators in the past.


1. James Politi and Colby Smith, "Janet Yellen vows to take hard line against currency manipulation," Financial Times, January 19, 2021.

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Joseph E. Gagnon Senior Research Staff