Treasury Puts Taiwan on Notice for Currency Practices

The Treasury Department said Friday that it is informing Taiwan, Vietnam and Switzerland of their currency practices, but it reconciled a more conciliatory tone than the Trump administration by ceasing to call one of them a currency manipulator.

The announcement was made in the Treasury Department’s first foreign exchange report under Secretary Janet L. Yellen. The report, which the Treasury Department submits to Congress twice a year, aims to hold United States’ major trading partners accountable for trying to gain an unfair advantage in international trade through practices such as the devaluation of their currencies.

To be classified as a currency manipulator, a trading partner must enter into negotiations with the United States and the International Monetary Fund to address the situation. The flaw is somewhat symbolic, but it can lead to tariffs or other retaliation if the talks break down.

Both Switzerland and Vietnam were on the list of currency manipulators after the Trump administration added them last year, and their removal on Friday means no country is currently facing that designation. Still, the Treasury Department said there are indications that Switzerland, Vietnam and Taiwan are not managing their currencies properly.

“The Treasury Department is working tirelessly to address foreign trade efforts to artificially manipulate their currency values ​​that unfairly disadvantage American workers,” Yellen said in a statement.

The decision is the latest attempt by the Biden administration to ease tensions with American allies after four years of former President Donald J. Trump’s confrontational stance towards international economic diplomacy. It also distracts the United States from Trump’s fixation on bilateral trade imbalances and takes a more holistic view of trade relations.

Revealing the extraordinary economic conditions caused by the pandemic last year, financial officials said they were not attempting to send mixed messages by pointing out that tampering was taking place, rather than labeling it as such.

“This report takes on a more measured and analytical tone in evaluating the monetary practices of US trading partners in relation to the Trump administration’s approach to using the report as a policy tool,” said Eswar S. Prasad, former China head of the International Monetary Fund . He said the Biden administration report “comes up with analytically balanced assessments of foreign exchange interventions by US trading partners.”

The Trump administration labeled Vietnam and Switzerland as manipulators in its 2020 final report, but the Biden administration said there wasn’t enough evidence to support the designation. To obtain the label, the Treasury Department must conclude that a country is manipulating the exchange rate between its currency and the dollar in order to “prevent effective balance of payments adjustments or to gain an unfair competitive advantage in international trade”.

Instead, the Treasury Department said it would pursue “increased engagement” with Vietnam and Switzerland and begin such talks with Taiwan, including calling on trading partners to address the undervaluation of their currencies. There is no fixed duration for the duration of such discussions without a resolution.

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April 16, 2021, 1:30 p.m. ET

Mark Sobel, chairman of the Official Monetary and Financial Institutions Forum, said the Biden administration is wise to take a more nuanced approach to assessing countries’ management of foreign exchange.

He noted that Switzerland was facing unusual monetary and security challenges and that Vietnam’s foreign exchange reserves were low when it received the manipulator label last year. A government can suppress the value of its currency by selling it in foreign exchange markets and by stocking dollars.

Furthermore, Taiwan, Thailand and South Korea have traditionally been worse offenders than Switzerland and Vietnam, according to Sobel, despite the fact that the United States has avoided asking them to.

“I think the new treasury team is more willing to recognize that the relative political divergence between the US and others is a major factor in this,” said Sobel. “I also think the Trump administration’s approach as a general proposal was much more bellicose.”

Taiwan was the United States’ 10th largest trading partner in 2019, according to the United States Trade Representative’s Office. Vietnam was the 13th largest and Switzerland the 16th.

While the United States has deepened ties with Taiwan in its efforts to confront China, the Biden administration also calls for greater investment in the American semiconductor industry to reduce the nation’s reliance on imports from Taiwan and other countries.

The financial report stated that Taiwan’s central bank “continues to actively intervene in the foreign exchange market” and that “less formal exchange-rate management practices” have prevented the Taiwanese dollar from fully reflecting macroeconomic fundamentals.

Currency analysts have expected the Biden administration to put more pressure on Taiwan to change its foreign exchange practices following the appointment of Brad Setser to a senior position in the office of the United States Trade Representative. As a member of the Council on Foreign Relations in 2019, Mr. Setser wrote in a report that Taiwan had hidden $ 130 billion in reserves to cover up its currency interventions and that the arguments for being named a manipulator were stronger than for the naming of China.

“Taiwan has really intervened on a massive scale to maintain an undervalued currency for competitive advantage,” Setser wrote on Twitter at the time.

The Treasury Department did not label China as a currency manipulator, but instead called on it to improve transparency about its foreign exchange practices.

The Treasury Department has put China, Japan, South Korea, Germany, Italy, India, Malaysia, Singapore and Thailand on its currency watch list, adding Ireland and Mexico.

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