The first semiannual “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” report under the Biden administration was published last week. Traditionally, this report has been the cornerstone of U.S. currency policymaking but became less central under the previous administration.
Under a Janet Yellen Treasury and a Joe Biden administration, this report should resume its traditional role as a central mechanism to articulate currency policy. Specifically, a rigorous systematic approach to assessment, emphasis on diplomatic engagement and involvement of international institutions aligns with President Biden’s desire to return to more conventional patterns of policymaking.
The details of this first report confirm expectations that Biden and Yellen would take a proactive stance against currency manipulation but that they would do so through rigorous analysis and the uses of remedies through bilateral and multilateral engagement through international institutions. Notably, the Treasury kept the criteria thresholds unchanged, which, given the data, led to Taiwan being flagged for the remedy process. This is a significant result, as geopolitical concerns argued for tweaks to allow Taiwan a more favorable result.
Additionally, this first report re-established the separation of the three-criteria process from being labeled a currency manipulator. This distinction was highlighted by the Treasury department removing the currency manipulator label from Switzerland and Vietnam, even though they continue to breach all three criteria and are still in the remedy process. Additionally, the Treasury held off on labeling Taiwan a currency manipulator in the latest report despite the country meeting the three-criteria standard that triggers the start of enhanced bilateral negotiations. By separating the three-criteria process and being labeled a currency manipulator, the Treasury department is creating more granularity and flexibility in the process as well as adding incentives for trade partners to engage in constructive negotiations.
Regarding China, the county has not met the three-criteria standard for some time now. Nevertheless, the country was criticized for the opaqueness of its state-sector currency intervention. It is important to remember that the U.S.–China conflict has moved beyond a simple mercantilist issue to a more complex conflict. The Biden administration is expected to put its focus on these deeper and more difficult trade and technology issues rather than simply the currency.
As a last point, the Treasury’s focus on global imbalances has re-emerged. In the past, this has led to debates between U.S. and European officials on the sources of European trade surpluses with the U.S. and on the role of government policy in reducing excess savings in certain European countries. | |
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