On October 16, the U.S. Department of the Treasury released its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies.  The report considers whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.  As has been the case for years, Treasury did not find a single currency manipulator despite several worthy candidates.

China was not named a currency manipulator despite only modest appreciation this year, an enormous current account surplus, and large foreign reserves.  Key metrics and practically all experts agree that the Chinese currency remains significantly undervalued and that Chinese authorities continue to intervene with the exchange rate.  The net effect is to make Chinese exports significantly more attractive to the rest of the world, at the expense of the United States and other manufacturers.

Korea’s economy is very dependent on external demand, as net exports have accounted for all its growth in 2014.  Weak internal demand, undervalued currency, sizeable current account surplus, and large reserves have forced Korea to intervene heavily in the foreign exchange market in 2014 to order to keep the won significantly undervalued.  Yet, Korea was not found to manipulate its currency.

Treasury claims to continue to push for comprehensive adherence to all G-20 commitments, including Korean and Chinese commitments to move more rapidly toward market-determined exchange rate systems and exchange rate flexibility, to avoid persistent exchange rate misalignments, to refrain from competitive devaluation, and to not target exchange rates for competitive purposes.  Yet, we are no closer than we were ten years ago to achieving these goals.  Maybe it is time for Treasury to reconsider its standards on what exactly is a currency manipulator.