When Janet Yellen was identified as President-Elect Biden’s Treasury secretary, we looked at how the job differed from the one she held at the Federal Reserve. The U.S. Treasury wields financial and political power, not to mention a strong international role that includes analysis and policy recommendations on a range of global trade issues. In mid-December, the Department of the Treasury issued a report to Congress covering foreign exchange that labelled Vietnam and Switzerland as currency manipulators. We'll look at this recent move and what it actually means.

Key Takeaways

  • Vietnam and Switzerland were designated currency manipulators by the U.S. Treasury in its December report.
  • The number of the countries on the watch list for manipulation also grew in 2020.
  • COVID-19 has driven governments to take drastic actions that have weakened their currencies.
  • There are few concrete consequences that come with the currency manipulator label.

Currency Manipulators and the Watch List

The Trade Facilitation and Trade Enforcement Act of 2015 and the Omnibus Trade and Competitiveness Act of 1988 are the two pieces of legislation that define Treasury's role when it comes to calling out currency manipulation. The acts help guide the Treasury in creating the criteria it uses when evaluating countries to see if their actions are harming U.S. workers and firms, and they also commit the Treasury secretary to providing semi-annual reports to Congress. The acts essentially require the Treasury secretary to monitor currency policies of U.S. trading partners and do further analysis and engagement with partners when:

  • There is a large trading surplus with the United States.
  • There is a material current account surplus.
  • There are repeated interventions where foreign currencies are purchased. 

The report outlines this in terms of the trading nation's GDP to define what is large, material, and significant, but the main takeaway is that a country is placed on a watch list if it hits two of the criteria above or if it accounts for a disproportionate share of the U.S. trade deficit. Countries that meet all three of the criteria are labeled as currency manipulators by the Treasury.

The December 2020 Report

Treasury's report is a hefty 50 plus pages with a lot of interesting data and specific recommendations of what Treasury wants countries on the watch and manipulator lists to change. The primary conclusion of the report is that a number of economies around the world have been attempting to slow or avoid the appreciation of their domestic currencies against the U.S. dollar. Treasury found that several of the United States' trading partners experienced significant increases in current account surpluses and the U.S. trade deficit increased overall. This is bad news for the United States, as the dollar is presumably being kept artificially high, making U.S. products less competitive globally.

Vietnam and Switzerland both graduated from the watch list to the currency manipulator list in the December report. The watch list – more properly called the monitoring list – already included China, Japan, Korea, Germany, Italy, Singapore, and Malaysia, and it added Taiwan, Thailand, and India in the most recent report. Ireland was removed from the watch list in December, as it now only meets one of the criteria (a trading surplus). 

The Significance of the Report

Being labeled as a currency manipulator by the U.S. Treasury sounds like a big deal, but the move is largely symbolic. In fact, investors may remember that the United States dusted off its currency manipulator labelling machine in 2019 to stick one on China during a rocky period in trade relations. At the time, however, China didn't really fit Treasury's criteria, so the label was mostly applied to justify retaliatory measures in a brewing trade spat. China's label was removed in the January report, and it moved back to the watch list.

Thus, Vietnam and Switzerland are unlikely to be concerned with the label, particularly as it comes from an outgoing administration. That said, the label does move the two nations into an exclusive club of being one of the only five countries to be designated currency manipulators by the U.S. government (Japan and Taiwan were labelled in the 1980s).

The real value in the report, however, is the insight it provides into how the United States views some of its largest trading partners and the changes it wants to see – although none of these are particularly hot takes. Italy and Japan need structural reforms to raise productivity? China should be more transparent and reduce state intervention? India needs to be more open to foreign investment? These are all things investors have been saying for decades.

What will be interesting, however, is if the Yellen Treasury continues with these recommendations. This is important because the United States is going to have an opportunity to push for some of these objectives in the course of negotiations should it choose to open the door to the Trans-Pacific Partnership (TPP) under the Biden administration. 

The Bottom Line

The Treasury report acknowledges that COVID-19 was a huge economic shock to the world and that countries poured money in to backstop their economies. The U.S. dollar's safe haven status has played a role in what the Treasury sees as deliberate overvaluation, but the department is correct in pointing out that many countries that depend on exports have been slow to take actions that might see their currency appreciate against the U.S. dollar. All the countries on the watch list and the currency manipulators list are engaged by the Treasury, but it is very doubtful that a stern talking to is going to sway them when strong exports to the U.S. are critical to keeping parts of their economy afloat.