US stops short of branding Vietnam, Switzerland, Taiwan currency manipulators

• Lists 11 countries including Singapore, India, Malaysia, Japan and China as warranting placement on its “Monitoring List” that merit close attention to their currency practices

WASHINGTON (Reuters): The US Treasury Department on Friday said Vietnam, Switzerland and Taiwan tripped its thresholds for possible currency manipulation under a 2015 US trade law, but refrained from formally branding them as manipulators.

In the first semi-annual foreign exchange report issued by Treasury Secretary Janet Yellen, the Treasury said it will commence “enhanced engagement” with Taiwan and continue such talks with Vietnam and Switzerland after the Trump administration labeled the latter two as currency manipulators in December.

The Treasury said Taiwan, Vietnam and Switzerland exceeded 2015 currency thresholds during 2020 – a more than $ 20 billion bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of gross domestic product and a global current account surplus exceeding 2% of GDP.

Despite the finding, it found insufficient evidence under an earlier 1988 law to conclude that Vietnam, Switzerland or Taiwan are manipulating exchange rates to gain a trade advantage or prevent balance of payments adjustments.

“For calendar year 2020, we have not made a finding regarding the manipulation designation,” a Treasury official told reporters, adding: “We don’t view this as a mixed message.” The move takes some pressure off Switzerland and Vietnam by lifting the manipulator designation for at least six months.

The Swiss National Bank (SNB) denied it manipulates the franc and said the report will not alter its monetary policy. “In view of the economic situation and the ongoing high value of the Swiss franc, the SNB remains ready to intervene in the foreign exchange market if necessary,” it said.

An official at Taiwan’s central bank said the US decision against applying the manipulator label showed continued good communication between Taipei and Washington on the issue and that US authorities understood Taiwan’s “special situation.” Taiwan’s tech-focused exports to the United States, including laptops and semiconductors, soared in 2020 due to the work-from-home boom sparked by the coronavirus pandemic.

In a statement on Saturday, the State Bank of Vietnam said it will continue to pursue a flexible exchange rate policy that is managed in a way to contain inflation, ensure macro-economic stability and not to create an unfair trade advantage.

Vietnam’s foreign ministry said in a later statement it welcomed the Treasury’s decision, adding: “Vietnam will maintain dialogues and consultancy with the US over this issue.” A Treasury official said it was possible for countries to meet the tests under the “mechanical” 2015 law and not be manipulating their currency to boost exports.

He said the report’s findings took into account the massive trade and capital flow distortions of the pandemic and the fiscal and monetary policy choices governments took in response.

Without the pandemic, the results would have likely been quite a bit different, including for the three economies that hit the engagement triggers, the official added.

The Treasury report also said the COVID-19 crisis was likely to continue to affect current account positions over the next year as recoveries accelerated in some economies and lagged in others, adding that these changes were cause for concern.

“Treasury is working tirelessly to address efforts by foreign economies to artificially manipulate their currency values that put American workers at an unfair disadvantage,” Yellen said in a statement.

The enhanced engagement includes formal talks to urge Vietnam, Switzerland and Taiwan to develop plans with specific actions to address underlying causes of currency undervaluation and external imbalances, the Treasury said.

The talks will also help the Treasury determine the reasons for the three trading partners to make substantial currency market interventions.

For Taiwan, it said it would initiate enhanced engagement in line with the Trade Facilitation and Trade Enforcement Act of 2015. It expects those talks to help determine if Taiwan manipulated its currency under the 1988 law.

The Treasury said no other major US trading partner met the relevant 1988 or 2015 legislative criteria for currency manipulation or enhanced analysis during the review period.

It urged China to improve transparency regarding its foreign exchange intervention activities, the policy objectives of its exchange rate management regime, the relationship between the central bank and foreign exchange activities of the State-owned banks, and its activities in the offshore yuan market.

It also said it found 11 economies warrant placement on its “Monitoring List” of major trading partners that merit close attention to their currency practices: China, Japan, South Korea, Germany, Ireland, Italy, India, Malaysia, Singapore, Thailand, and Mexico. All except Ireland and Mexico were included in the December 2020 report to Congress.

Reaction in the foreign exchange market was muted, with the Swiss franc modestly stronger and the Mexican peso only slightly weaker.

Thailand’s central bank said it did not see an impact on business flows or its ability to implement macroeconomic policies to safeguard domestic stability after remaining on the US monitoring list.

The Bank of Thailand maintains the country has never used the exchange rate as a tool to gain an unfair trade advantage, Assistant Governor Chantavarn Sucharitakul said in a statement.

Thierry Wizman, global interest rates and currencies strategist at Macquarie Group, said: “This strikes me as a political decision, not a rules-based decision,” adding the Treasury appeared to be trying to determine the intent of foreign exchange policies.

“It sounds like the administration is trying not to offend allies here... those allies that are going to be most important in containing China,” Wizman said.