International Relations Prelims cum Mains

US refrains from naming China, others as currency manipulators

Details :

The news:

  • Recently released the U.S. Treasury’s semi-annual currency report refrained from naming any major trading partners as currency manipulators.

 

Highlight of report:

About currency manipulation:

What ‘currency manipulation’ mean?

  • Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective.
  • The typical claim – often doubtful – is that countries manipulate their currencies in order to make their exports effectively cheaper on the world market and in turn make imports more expensive.
  • After intervention by China, China’s Yuan falls against the U.S. dollar, Chinese products become cheaper in the U.S. market and American products become more costly in China.

Why is it important?

  • Currency manipulation is a term that is often used in the political discourse of countries with substantial trade deficits.
  • The United States even goes so far as to produce a biannual report identifying which countries are “currency manipulators”.

 

What labeling China a currency manipulator means?

  • If Treasury designates China a currency manipulator under a 2015 law, it is supposed to spend a year trying to resolve the problem through negotiations.
  • Should those talks fail, the U.S. can take a number of small steps in retaliation, including stopping the U.S. Overseas Private Investment Corp., a government development agency, from financing any programs in China.

 

Why Treasury did not name China as a currency manipulator?

  • If treasury names China, then it means handing over control to Congress. And by not labeling them, Trump Administration can continue pushing China through the Executive branch.
  • Hence it was not surprising that Treasury did not name China a currency manipulator, saying that doing so is not the administration’s interest.

 

 

Other Points:

On China:

  • The report comes as the Trump administration pursues potential tariffs, negotiations and other restrictions to try and cut a massive trade deficit with China.
  • Global risk: Although report did not name China as currency manipulator it criticized China for the “non-market direction” of its economic development which poses growing risks to its major trading partners and the long-term global growth outlook.
  • Opening economy: Report recommended for “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.
  • Household consumption: Treasury said China should advance macroeconomic reforms that support greater household consumption growth and help rebalance the economy away from investment.
  • Devaluation of Yuan: Treasury also said it “places significant importance” on China adhering to its G20 commitments to refrain from engaging in competitive devaluation of its yuan.
  • However the report did not mention President Trump’s recent threats to impose billions of dollars’ worth of tariffs on Chinese goods over Beijing’s intellectual property practices, or pending Treasury investment restrictions on Chinese investment in the United States.

On India:

  • In the report, the U.S. Treasury said it has added India to a monitoring list for extra scrutiny, while keeping China, Japan, Germany, South Korea and Switzerland on the list started in 2016.
  • Treasury said India had increased its foreign exchange purchases in 2017. Also India maintains some controls on both inbound and outbound flows of private capital, further reserve accumulation does not appear necessary.
  • India ran a goods trade surplus of $23 billion in 2017 with the United States, far less than China’s $375 billion goods trade surplus.

On South Korea interventions:

  • The report did not provide an update on a currency agreement under negotiation with South Korea that was announced as part of an update to the U.S.-South Korean Free Trade Agreement.
    • The agreement was aimed at increasing the transparency of Seoul’s foreign exchange interventions, and the Treasury said Seoul should “promptly begin reporting” such data.
  • The report added that South Korea should limit currency intervention to only truly exceptional circumstances of disorderly market conditions.

On Other nations:

  • The report recommended that South Korea, Japan, Germany and Switzerland all take steps to bolster domestic demand, which would help to reduce current account surpluses and trade surpluses with the United States.
  • The Treasury said Germany “has a responsibility” as the world’s fourth largest economy to contribute to more balanced trade flows.
  • Allowing an increase in domestic demand against relatively inelastic supply should help push up wages, domestic consumption, relative prices against many other euro area members and demand for imports.

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