Despite Minor Changes in Treasury's Foreign Exchange Report, Major Flaws Remain



The US Treasury’s recently released report to Congress identifying countries that manipulate their currencies to gain unfair trade advantages reflected welcome and not-so-welcome changes in approach on the issue. But major flaws remain in the Treasury’s criteria, and they blind the department to the very practice it is supposed to combat.

The report, entitled Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, details Treasury’s framework for identifying countries that manipulate their currencies. It increased the number of countries it assesses and tweaked its criteria, but did not name any countries as currency manipulators.

In their 2017 book Currency Conflict and Trade Policy: A New Strategy for the United States, C. Fred Bergsten and Joseph Gagnon  proposed rigorous criteria to identify episodes of currency manipulation. The book found 20 countries that purchased excessive amounts of foreign currencies to hold down their own currencies and support large trade surpluses in at least one year during the years of large-scale currency intervention from 2003 through 2013. A previous post updated data on these countries through 2018. Total currency purchases by these countries were lower in 2018 than during 2003–13, but Singapore, Norway, and Macao continue to manipulate, with total purchases of more than $100 billion last year.[1]

The Treasury’s mandate to examine this issue derives from the Trade Facilitation and Trade Enforcement Act of 2015, which calls on the department to examine major US trading partners to identify those with “a significant bilateral trade surplus with the United States, a material current account surplus, and. . .persistent one-sided intervention in the foreign exchange market.” The US administration is directed to discuss the issue with countries that meet these criteria and to develop plans to remediate the situation. Lacking satisfactory progress, the administration is authorized to impose sanctions, including prohibitions on government procurement from or loans to the offending country.

Treasury initially adopted three criteria to identify currency manipulators and limited its analysis to the 12 largest trading partners:

  1. a current account surplus of at least 3 percent of GDP;
  2. net purchases of foreign exchange reserves exceeding 2 percent of GDP, with net purchases in at least 8 of the 12 months under review; and
  3. a bilateral trade surplus with the United States of at least $20 billion.

As described below, Treasury has modified a couple of these criteria in its latest report. Countries that meet all the criteria in a given review period are to be designated currency manipulators. No country has yet been designated. Countries that meet two of the three criteria are placed on a “monitoring list,” which currently includes China, Germany, Ireland, Italy, Japan, Korea, Malaysia, Singapore, and Vietnam.

Perhaps most important among the changes in the latest report, Treasury expanded the scope of countries examined from the top 12 trading partners to all trading partners with at least $40 billion in combined bilateral goods exports and imports, reaching 21 countries for the 12-month examination period of calendar 2018. Given limited staff resources and the congressional mandate to focus on “major trading partners,” it is reasonable for Treasury to restrict its analysis to larger countries. But the bilateral trade element of this criterion is unfortunate. Countries that do not trade directly with the United States may still affect the value of the dollar and the size of the US trade deficit.

Regarding the current account criterion, Treasury lowered the threshold for the current account surplus from 3 to 2 percent of GDP in its latest report, becoming less forgiving of imbalances. Treasury did not explain this change, which seems unduly restrictive. Bergsten and Gagnon (2017) use a 3 percent of GDP limit for the current account balance.

On the other hand, Treasury retained the 2 percent of GDP threshold for net purchases of foreign exchange reserves but relaxed the requirement from 8 months to 6 months of net positive purchases within the 12-month review period. Bergsten and Gagnon also use a 2 percent of GDP criterion with no minimum on the number of positive months because it is the overall magnitude of purchases that matters, not the frequency.

A major flaw in Treasury’s analysis is its limitation to purchases that are designated as official foreign exchange reserves. This restriction fails to account for other purchases by governments and central banks that are not classified as reserves. These nonreserve official purchases have similar effects on exchange rates as reserve purchases, so it is important to capture them in any manipulation assessment. A country can evade designation as a manipulator by simply declaring its purchases are not foreign exchange reserves. China and Korea have set up sovereign wealth funds in part to enable purchases of foreign assets that are not tracked by the US Treasury.

Treasury did not change the bilateral surplus criterion. The $20 billion limit appears to have been chosen to avoid naming Taiwan as a manipulator in past reports. It is unfortunate that Congress set a bilateral surplus as a requirement for Treasury’s designation of manipulators. Bilateral trade balances do not appropriately capture the trade-distorting effects of currency manipulation. Bilateral imbalances would exist even if every country had balanced trade and there was no currency manipulation. Bilateral trade patterns reflect differences in resource endowments, economic structures, and historical commercial links that are independent of currency policy. From this starting point, currency manipulation raises a country's exports and reduces its imports roughly equally against all other countries. This makes its bilateral surpluses larger and its bilateral deficits smaller, but it does not necessarily eliminate all bilateral deficits. A bilateral surplus with the United States is therefore not a necessary condition for currency manipulation. Singapore evades Treasury’s designation as a manipulator because of this criterion.[2] Congress should remove it from Treasury’s mandate.

Finally, an important gap in Treasury’s criteria is the lack of any measure of reserve adequacy. Countries should be allowed, and encouraged, to hold enough reserves to cushion themselves against adverse shocks to their economies. Among the reasons a country will want to hold more reserves are when it has (1) a larger share of imports in consumption and (2) a larger amount of debt in foreign currency, especially short-term debt (Bergsten and Gagnon 2017, 77). Treasury’s latest report argues that Vietnam’s relatively low level of reserves is an important reason not to charge it with currency manipulation.[3] Treasury should add reserve adequacy to its list of formal criteria.


1. Although Bergsten and Gagnon applied their criteria to all high-income and upper-middle-income countries, they recommended that the United States should take remedial action in the form of countervailing currency intervention only against manipulators among the largest economies as defined by membership of the G-20.

2. The other 2018 manipulators under the Bergsten-Gagnon criteria, Norway and Macao, are not among the 21 largest US trading partners that Treasury examines.

3. In 2018 Vietnam exceeded the current account surplus and bilateral trade surplus criteria and nearly exceeded the criterion on purchases of foreign exchange reserves. Another argument for not naming Vietnam as a manipulator is that it is a relatively poor country, and there is a longstanding presumption in the World Trade Organization and other international bodies that poorer countries need not be held to the higher standards of conduct expected from wealthier countries.