- August 7, 2019
- Posted by: InsightsIAS
- Category: INSIGHTS
Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
What to study?
For prelims: What is currency manipulation, how is a country designated as a currency manipulator?
For mains: On going trade war between China and the US, concerns and impact on other countries.
Context: US officially labels China a ‘currency manipulator‘.
The announcement by the US Treasury follows a sharp fall in the value of the Chinese yuan against the dollar.
Why is the US worried?
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies.
China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market.
In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past.
What is currency manipulation and who determines it?
The US Department of the Treasury publishes a semi-annual report in which the developments in global economic and exchange rate policies are reviewed.
If a US trade partner meets three assessment criteria, the US labels it a currency manipulator.
The US Treasury department defines currency manipulation as when countries deliberately influence the exchange rate between their currency and the US dollar to gain “unfair competitive advantage in international trade”.
How are countries identified for the currency manipulation list?
- The US Treasury has established thresholds for the three criteria. First, a significant bilateral trade surplus with the US is one that is at least $20 billion.
- Second, a material current account surplus is one that is at least 3% of GDP.
- Third, persistent, one-sided intervention reflected in repeated net purchases of foreign currency and total at least 2% of an economy’s GDP over a year.
The Treasury’s goal is to focus attention on those nations whose bilateral trade is most significant to the US economy and whose policies are the most material for the global economy.
When the US Treasury labels a country a currency manipulator – as it has done here with China – the next step would normally be for negotiations to begin between the two countries. In this case, trade negotiations have already been going on for more than a year.
The process also opens the path for America to introduce tariffs. Again, that’s already happening as part of Mr Trump’s ‘America First‘ approach to trade.
Under the 1988 Omnibus Foreign Trade and Competitiveness Act, the U.S. will have to negotiate with China or take its case to the International Monetary Fund. Potential penalties by the U.S. include:
- Banning the Overseas Private Investment Corporation — an American government agency that invests in developing countries — from financing China.
- Excluding China from U.S. government procurement contracts.
Sources: the Hindu.